It’s likely you’ve heard about the new tax legislation – the Tax Cuts and Jobs Act – and that it will impact you as a business owner. But do you know how the new tax law and your photography business will interact with each other?
Firstly, you need to make sure you understand the type of entity of your photography business. If you don’t know whether you are a sole proprietor, have a limited liability company (LLC), S-Corp, C-Corp, partnership etc., be sure to read up first so you can understand how the rest of this article applies to your photography business. Specifically, you need to know if you operate a “pass-through” entity or your entity is subject to corporate tax.
Either way this tax law applies
Either way, the new Tax law will not apply to your 2017 taxes – those are the ones you have to file this coming April. Read this article for information about 2017 taxes. Most provisions of the new law affecting individuals and businesses go into effect on Jan. 1, 2018. For instance, new tax brackets take effect on January 1 of next year, as will the new standard deductions, which means it will be your tax filing in April 2019 that will incorporate the changes.
For pass-through entities, changes to the individual (and married, if filing jointly deductions) will impact you. For example, the new law provides for up to a 20% reduction of their business income. So, a sole proprietor generating $180,000 of business income would be able to deduct $36,000 on his Schedule C. Instead of adding $180,000 to his adjusted gross income, she would add $144,000. There is an exception to the 20% business income reduction for service-based businesses, including photographers, earning more than $315,000 a year. You should note that the pass-through entity tax deduction is an individual deduction which means that it expires at the end of 2025, along with the other individual income tax reductions. (Meanwhile, the corporate tax cut is permanent.)
Only pass-throughs that perform work in the United States and sell goods and services in the US can qualify. If you have production facilities abroad but sell products in the United States, the deduction may apply only to the portion of your income generated from your U.S. sales. So too, destination photographers or photographers who have a client base just across the border into Canada or Mexico will need to obtain additional advice.
How much of my business is based on my reputation or skill?
This is an important question because the deduction is disallowed for pass-through businesses that have as their “principal asset” the “reputation” or “skill” of the owners or employees unless they make under $315,000 per year (married filing jointly, or $157,500 if single). That raises a lot of questions for tax experts and for photographers, and to be frank, the answers are not entirely clear as yet.
This new deduction is described in broad strokes here – the formula and threshold tests are more complicated than the up to 20% deduction might make it seem – speak with your CPA for more specifics!
There have also been changes to corporate tax rates. Like individual tax rates, they are progressive and phase in based on income. For 2017, corporate rates range from 15% to 39% (except for personal service corporations which are taxed at 35% – this is unlikely to describe a photographer’s company entity) while individual tax rates range from 10% to 39.6%. While the brackets vary, the rates for individuals and corporations are almost completely aligned. The new tax law now provides for a flat 21% tax rate for corporations.
Talk to your Tax Advisor about the implications for your personal tax filing
While some photographers may benefit from a reduction in taxable business income, many photography business owners may also benefit from the reduction in individual tax rates. Business owners living in higher taxation states (including California, New York and New Jersey) who itemize deductions may not benefit as much as others due to the new caps on deducting state and local taxes ($10,000) and mortgage interest. However, for those in lower taxation states (including Wyoming, Florida, and Nevada), the combination of reduced business income and lower individual tax rates is likely to result in a reduced tax bill. For example, under the new tax plan, most individuals are eligible for a $12,000 standard deduction with a married couple filing jointly being eligible for a $24,000 standard deduction.
It might be time to buy that new camera or that lighting setup you’ve been wanting!
The biggest change in relation to deductible expenses will benefit businesses that invest in equipment, allowing full write-off for five years and increasing the small-business “expensing” cap to $1 million from $500,000 (s.179).
- Review your plans for 2018-2019 with the guidance of your CPA to ensure you understand the full impact of these tax changes on your business and personal tax situations.
- If you are looking at altering the business entity or type of business form, speak to an attorney sooner rather than later about your options and their recommendations based on your circumstances. This is a helpful article about how to set up a photography business!
- The IRS hasn’t said when it will offer clarifying guidance on the pass-through deduction.
- Consider being conservative when calculating estimated tax payments throughout the year. One approach is to make estimated payments that total 110% of your 2017 tax bill by the end of 2018 (or 100% if your adjusted gross income is less than $150,000). By approaching your estimated tax payments in this manner, you will likely avoid underpayment penalties if you end up owing the IRS when you file your 2018 taxes.
- Forewarned is forearmed: take time to understand the impact of the new tax law on your photography business and save yourself trouble in the future!
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