Talking Trump’s Tax Cuts: What’s a Pass-Through Business?

Tax legislation can be hard to understand. And with large bills, it can take quite some time for all the fine details of a bill to be parsed through by experts. Case in point: The Tax Cuts and Jobs Act of 2017. Though this $1.5 trillion tax bill was passed last year by Congress, we’re still getting rolling updates about what, exactly, certain sections of the bill mean. And what it might mean for your pass-through business.

On August 8, the Treasury Department and the IRS spelled out the details of the 20 percent deduction against income taxes for pass-through businesses.

More than the controversy it raised—since the Trump Organization is a pass-through business—the bill raised a lot of confusion. You may not have had time to read the full 184-page document (We can’t blame you!). But as a small business owner, can you expect to benefit on your small business taxes?

We’re here to help you understand what the new tax cuts mean for you.

What Is a Pass-Through Business?

Let’s begin with a simple definition.

A pass-through business entity doesn’t pay corporate income taxes, and instead passes its income directly to its owners, who then pay their individual income taxes.

Business owners use pass-through businesses to avoid being taxed twice, or “double taxation,” when you’re taxed as a business and then taxed on your personal income from that business. For example, let’s say you own a landscaping company. Rather than paying corporate taxes on your company’s income—then again on your person income—a pass-through business allows you to pay your personal income taxes only. This can be a huge benefit during a slow year when every penny counts.

Pass-through businesses can really benefit small business owners who hold a large stake in the performance of their business. With that said, most U.S. businesses are actually structured as pass-throughs. Even huge companies like the Trump Organization are pass-through businesses, so that means their owners only pay individual tax rates on the income.

Advantages of Being a Pass-Through Business

Before the new tax laws, most pass-through owners (like you and your landscaping company) were taxed the top individual tax rates. Now, small business owners can take advantage of some reductions on their own tax rates and take a 20 percent deduction.

There’s some important fine print. Pass-through owners are only slated for this temporary relief through 2025. Republicans in the House of Representatives may eventually make this change permanent, but for now, that expiration date is still looming. So you and your landscaping company had better take advantage while you can!

Does the New Tax Law Benefit My Small Business?

There are plenty of details still being ironed out—but here’s a few highlights.

Under the new tax law, any business owner earning less than $157,500, or couples earning less than $315,000 and filing jointly, can take the deduction—regardless of the field their business is in. After that threshold, the tax law begins phasing out who is eligible. Generally, it excludes “specified service” professions like doctors, dentists, accountants, performing artists, and athletes.

There’s a lot more exclusions and exceptions in the bill than we can get into here, but Brookings has provided a great in-depth breakdown.

Tax Cut Takeaways

The Tax Cuts and Jobs Act of 2017 was one of the largest tax reform bills in U.S. history, and that means it came with a lot of details. As a small business owner, your path to understanding how you can benefit is by paying attention as more news about it comes out.

After all, the more you learn about the tax landscape, the more you can pass that knowledge through to savings.