By Barry G. Fowler, Land Line contributor | Monday, January 08, 2018
The tax reform bill that Congress voted to approve Dec. 20, contains numerous changes that will affect individuals, as well as businesses large and small. The question everyone has is, “How does tax reform help me?”
The bill will be effective for the 2018 tax year and beyond. That means most taxpayers will not see the changes of the new law for about a year, when they file their 2018 taxes in April 2019, although wage earners may see differences to the amounts withheld from their paychecks before then as early as February.
Among the main changes are new tax brackets and the elimination of many itemized deductions. In general, the new tax rate structure means lower tax rates, expanded tax brackets (the 10 percent bracket now extends to almost $10,000 for individuals and $19,000 for joint filers, which doubles the amount of income taxed at the lowest rate). The standard deduction also has been doubled to $12,000 for individuals and to $24,000 for joint filers.
How does this bill help owner-operators?
The real savings for owner-operators is for those who operate as a pass through company (an S corporation, partnership or multiple-member limited liability corporation). These are the types of businesses where the owners pay regular income taxes on the profits of their businesses when those profits pass through to their personal income tax return.
The big kicker for owner-operators in the tax reform bill is the Section 199A deduction, also known as the qualified business income deduction. The basic qualified business income deduction is 20 percent of net qualified business income, which is a significant tax break for business owners. But there are rules and limits, of course.
For example, if you make $200,000, the deduction is $40,000. Multiply that by your marginal tax rate of 24 percent. That equals a $9,600 tax savings for you.
Now let’s keep in mind under the tax bill you can deduct 20 percent of pass-through business income, and that may end up giving you a lower rate than your marginal tax rate. As always, there are some devils in the details, of course.
Wilma makes $100,000 in net trucking income but also deducts $5,000 for self-employed health insurance and $10,000 for a SEP IRA. Her deduction is ($100,000 less $15,000) or 20 percent of $85,000, which is $17,000. If Wilma was in the 32 percent marginal bracket, she would save $5,440.
Some optimization is necessary for a small-business owner to get the most from the Section 199A deduction. On one hand, we want to reduce W-2 salaries to shareholders to minimize self-employment taxes. On the other hand, we want to increase W-2 salaries so they do not limit the amount of Section 199A that is deducted. You need to consult your tax professional for advice to optimize the highest deduction for your business.
Additional good news for truckers in this bill is that HR1 does not change overnight per diems (Section 274(n)(3) of the IRC Code). That means truckers retain the ability to claim 80 percent of the $63 per diem for nights away from home. The $63 per diem for 2018 rates became effective October 2017.
The per diem works like this: In order to deduct your travel expenses, you must be away from your home residence or tax home longer than what would constitute your ordinary workday. You must be away from your home long enough that you cannot complete the trip without sufficient sleep or rest. However, per diem payments in excess of the federal per diem rate are subject to income and employment taxes.
Barry G. Fowler, EA, is the CEO of Taxation Solutions. He is an expert specializing in IRS problem solving, tax resolution and financial planning. His firm, Taxation Solutions, has settled millions in IRS tax debt. He also has worked closely with OOIDA Foundation online education series on “Dealing with the IRS.”
Copyright © OOIDA