W- 2 wages paid to employees and $100,000
in assets. Because the taxpayers are above the
$415,000 threshold, their business deduction
will be $125,000. Here’s how it’s calculated
(buckle up). First, take the lesser of these two
numbers: 20 percent of net business income
($1,000,000 x 20 percent = $200,000) vs. 20
percent of taxable income ($990,000 x 20
percent = $198,000). Then, compare it to the
greater of these two figures: 50 percent of W- 2
wages ($250,000 x 50 percent = $125,000) vs.
25 percent of W- 2 wages plus 2. 5 percent of
unadjusted cost basis of assets ($250,000 x 25
percent + $100,000 x 2. 5 percent = $65,000).
Finally, take the lower number of that compar-ison, and that’s your deduction.
Alternatively, hire an accountant.
LLC VS. S CORP
Both LLCs and S Corps will benefit from the
20 percent tax cut, but there are important
differences between the two legal entities.
While any income you earn as an LLC is
passed directly to you (and taxed accordingly), S Corps are more complicated, but also
generate higher tax savings, says photographer and accountant Jessica Watson.
Owners in an S Corp have to pay themselves a “reasonable salary” from their business earnings. You’ll need to work with a
tax attorney or accountant to determine
your specific reasonable salary, but operating under an S Corp can lower the amount
of self-employment taxes you’re required to
pay. That’s because, in addition to your “
reasonable salary,” Scott says, you can also pay
yourself dividends from the business (i.e. excess money over and above your reasonable
salary) that are taxed at a lower rate.
Watson says if photographers are earning
over $50,000 a year from their business, they
should consider organizing as an S Corp. “It’s
no longer a simple schedule C, it’s more convoluted,” she concedes, but the tax benefits
outlined above make it an attractive option.
You can change your business structure from
an LLC to an S Corp to enjoy these extra
benefits, though you cannot change from an
S Corp to an LLC, a switch that Watson says
wouldn’t make financial sense anyway.
Creating an S Corp is complicated and
requires a lawyer to draft the documents.
That’s why Scott advises forming an LLC but
filing your taxes as an S Corp (which, as odd
as it sounds, is allowed in the U.S. tax code).
This “let’s you enjoy the ease and simplicity
of an LLC, but also lets you enjoy the lower
overall tax situation of the S Corp’s ability to
split the income into wages and dividends,”
SOME BUSINESS DEDUCTIONS
ARE ALSO CHANGING
While the 20 percent pass-through write-off
is likely going to cheered, the changes to
business expense write-offs are a bit more of
a mixed bag.
On the plus side, Scott tells us that you’ll
recoup more for miles driven. Under the
old tax regime, you could be reimbursed
53. 5 cents for every mile you drove for business purposes. Under the new tax bill, that
amount is now 54. 5 cents.
Businesses are also now allowed to deduct
100 percent of the cost of their equipment.
“Prior to this, the new camera you bought
needed to be depreciated over five years,”
Scott explains. “Now you can write off 100
percent of its cost in year one.”
Starting in 2018, you’ll no longer pay a tax
penalty for not having health insurance if you
opt not to insure yourself.
Deductions for entertaining expenses are
being repealed, Watson says. You can still
deduct 50 percent of business-related meals,
so you can still deduct that client coffee from
your taxable income, but you can’t take them
out to a show, shooting range, or whatever it
is people do for fun these days, and expect
Uncle Sam to offset your tab.
Iryna Stepanchuk is a CPA and
founder of Stepanchuk, CPA, a
New York-based accounting firm.
Brandon Scott is a wedding
photographer and CPA based in
Jessica Watson is a wedding
and portrait photographer, and
the accountant/founder of JMW
Financials, based in Lehigh Valley,
Amy Northard is an Indiana-based accountant serving the