There are big changes coming in the world of taxes (2018-2025) and you need to know how to prepare. If you've ever thought about finally turning your hobby into your own small business, now is the time to do it!
Let's start with the good news...
What will you pay?
With this new tax bill, you're going to be paying less with your small business!
There's a solid 20% deduction for sole proprietorship, LLC, partnership or S-Corporation! This means you'll only pay taxes on 80% of your taxable income.
If your taxable income is $50k, you'll only pay taxes on $40k (2018-2025). $40k is 80% of $50k. This is the equation to use:
1. Pull up your calculator and enter your taxable income.
2. Multiply by 0.80, hit the equal sign.
4. This is the amount you'll pay taxes on!
If you make over $157k in your small business (or $315k married), things get a little complicated.
I've come across a tax expert who focuses on small businesses, particularly online businesses. Here's his blog for more detail on this specific subject: Online Biz Tax Guy.
So What Else Can You Expect?
For most of the middle-class, taxes have generally been lowered. Check out the Online Biz Tax Guy's infographic here that illustrates the old rates versus new rates.
It's interesting to hear how the standard deductions have doubled, making it easier to do a tax return, but the benefits you use to see having a mortgage, property taxes, and charitable contributions may no longer exist. The combinations in the new tax bill actually make a lot of people's taxable income higher.
If you're use to deducting personal expenses like uniforms and tools, then you're going to be out of luck. The personal exemption deduction for each person (i.e. yourself, spouse, kids) you claimed on your tax return is also eliminated. It's not all bad news though. If you do have kids, you'll be able to benefit from the expanded child tax credits.
If you have about 30 minutes, here's a video by the same tax expert that explains everything in more detail and in layman's terms.
15:23 Big Change # 6 - 20% Small Business Deduction
19:40 Big Change # 7 - Miscellaneous Itemized Deductions Eliminated
What should you do differently this year?
If you usually deduct entertainment expenses such as business lunches and dinners, you won't be able to do this anymore. That's the biggest change you'll have to be aware of.
You should also really consider turning your hobby into a business if you haven't done so already. Now is the time to get incorporated and start living your dream. Here's how to get started:
Have a question?
Ask the Online Biz Tax Guy your question here.