Is Your Schedule C Still Going to Work With the New Tax Act?

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If you wait until 2019 to think about your 2018 taxes, you’re going to be paying a lot more than you need to pay.

That’s why I am writing “Taxmaggedon 2018”. It’s fully of strategies you need to put in place RIGHT NOW so you don’t get an unhappy surprise in 2019.

Make no mistake. What worked in 2017 will not work in 2018.

Here’s an excerpt from “Taxmaggedon 2018”, due out April 2018. Will this happen to you?

Sole Proprietorship (Schedule C) with High Income

To set the stage, the Schedule C is a pass-through entity. The rules are straight forward if your taxable income is under $315,000 (married, filing jointly) or $157,500 (single). But what happens if your taxable income is over that amount?

From “Taxmaggedon 2018”:

“Now let’s assume that you have a Sole Proprietorship (Schedule C) and have no employees. Your business is a product based company and makes a net of $500,000. You are married and your taxable income is over the first threshold. We’ll also assume you do not have significant capital improvements in the company.

With that fact pattern, let’s look at your alternatives.

Alternative #1: You can’t pay yourself wages from a Sole Proprietorship. Any Section 199A income reduction would be subject to the wage limitation rule. Since there are no wages paid, there is no pass-through income reduction.

Alternative #2: Let’s assume that there is actually an employee that receives $50,000 in wages. The initial Section 199A deduction would be $100,000 (20% x $500,000 in income), but under the wage limitation rules, it would be limited to just $25,000 (50% of $50,000 paid in wages.)

Alternative #3: Let’s assume that you have one employee who is paid $50,000 in wages and you have qualifying capital investment of $500,000 in equipment Your initial 199A deduction would be $100,000 (20% x $500,000) but remember, you’re subject to the wage limitation rule

In this case, you’re limited to the greater of (1) 50% of wages or $25,000 (50% x $50,000) or (2) 25% of wages, $12,500 (25% x $50,000) plus 2.5% of capital, $12,500 ( 2.5% x $500,000) for a total of $25,000. In either case, the limitation would be $25,000. “

There are a number of new terms with this new Tax Act.

Service vs Product vs Blended Business:  Which one do you have?

First income threshold & Second income threshold: Where does your taxable income fall?

Wage limitation: Does this matter for your business? If so, which one of the two possibilities is best for you?

So far, I’ve got 3 different strategies for this case. But in each of those strategies, you have to put them in place before the end of the year. You can’t wait until 2019.

Are you ready?

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