How Tax Reform Affects Owner-Operators
Posted: 08 Mar, 2018 by Sean Bryant
In December 2017, Congress passed one of the largest tax reform bills since the 1980s. The Tax Cuts and Jobs Act will affect owner-operators starting this year, and continuing through at least 2025. At that point, certain parts are scheduled to expire, unless they are renewed by Congress.
The goal of this tax legislation was to help simplify the entire tax filing process. Unfortunately, many of the changes added an extra layer of complexity. Within this article we’ll hopefully clear up some of the questions you might have surrounding the changes to the IRS tax code.
Under previous tax law, all net income or loss from a sole proprietorship, partnership, or S-corporation would not be taxed on the entity level. Instead, it would be passed on to the individual members. This pass-through income would then be taxed based on the member’s tax rate.
The Tax Cuts and Jobs Act added a 20% deduction for any taxpayer that has Qualified Business Income (QBI) from a sole proprietorship, partnership, or S-corporation. For the average sole-proprietor owner-operator, this could mean a tax savings of around $2,000 per year.
Have you been considering a move from a sole proprietorship to an S-corporation? If so, now might be the perfect time. In Table 1 below, we compare two different owner-operators and how the new tax law could impact their tax liability. One is set up as a sole proprietor and the other as an S-corporation.