Small Tech Business
The second big hit affects those companies with pass-through income, which the Brookings Institute estimates is about 95 percent of domestic businesses. In a nutshell, income is considered ‘pass-through’ when it flows from a business directly into the pockets of those running it. LLCs, S-Corporations and other sole proprietorships are considered pass-through entities. Pass-through income determines personal tax liability as well as Social Security and Medicare taxation. Personal tax liability has a limit of 39.6 percent (or as little as ten percent, depending on which bracket you fall into), which isn’t new. Social Security and Medicare taxes can hit 15.3 percent; The Tax Foundation says most pass-through businesses are taxed at the maximum rate of 46.2 percent. An addendum to the bill would allow those small companies to qualify for a 25 percent tax bracket so long as they jump through a few hoops. Most notably, LLCs must file as an S-Corp; unlike an LLC, an S-Corp cannot have non-U.S. citizens or residents as owners, and have restrictions on being or owning subsidiaries (you can’t have an LLC that owns an S-Corp, for instance). The new S-Corp tax rate allows a business to report 70 percent of its earnings as pass-through, and retain 30 percent as business income. The pass-through personal income is taxed at the traditional rates, while the 30 percent business income is taxed at the new 25 percent rate. Depending on how your income shakes out, this could prove beneficial if it slots you into a lower personal tax bracket.S-Corps must have bylaws, issue transferable stock, hold director and investor meetings with minutes and corporate records, assign or elect directors and officers, and exist with an eye toward the long-term. If you just want to make some endless-scrolling games for Android, the S-Corp stretch may not be worth the risk. While an LLC can exist as a subsidiary, an S-Corp can be wholly assumed via stock purchases. Moreover, professional services are excluded from the 70/30 tax break. Shoot-‘em-up app developers can likely get crafty with taxes, but individual consultants may not have the same opportunity. But who’s really affected? According to the Small Business Administration (SBA), just about everyone. It says small businesses make up 99.9 percent of U.S. employer firms. Furthermore, 80 percent are non-employer (businesses without employees, or single-person entities), and 86.4 percent are sole proprietorships (typically, but not always, LLCs) while 4.7 percent are S-Corps. Around 60 percent of firms without paid employees are home-based. As the SBA goes on to note, 98.5 percent of tech is small employer firms; 46 percent of those companies offer “computer system design and related services,” while 36 percent provide “architectural, engineering and related services.” The remaining 18 percent fall into the ‘other’ category. The number of “software publishers” grew ten percent between 2012 and 2014. [caption id="attachment_138950" align="aligncenter" width="5333"] Work remote and enjoy life![/caption]My accountant just emailed me, suggesting I start contacting my representatives if I want to prevent major increases in my tax liability. THAT’s how bad this tax bill is for small businesses.
— jcieplinski (@jcieplinski) December 2, 2017