As we delve into tax strategies, you have a powerful tool—the Section 199A deduction under the Tax Cuts and Jobs Act. It’s time to explore how this can be a game-changer for your business.
The 20% Boost for Pass-Through Entities (2018-2025):
This provision can enable you to save an additional 20% on your qualified business income, a significant boon for entities like sole proprietorships, partnerships, and S corporations. But there’s a strategy to it, particularly regarding how you manage your salary.
S Corporations: The Delicate Dance of Salary Strategy
- The Lower Salary Gamble: Some entrepreneurs reduce their salaries to minimize payroll taxes, aiming for a larger Section 199A deduction. However, be cautious! This approach can often trigger IRS red flags, as it may appear you’re artificially boosting your deduction. It’s a strategic path that needs to be tread carefully to avoid unwanted attention and potential penalties.
- The High Salary Approach: Conversely, a higher salary means increased payroll taxes but can demonstrate compliance and reasonableness, potentially safeguarding your deduction. The challenge lies in finding the salary sweet spot that benefits your tax scenario.
- The Zero Salary Scenario: Particularly for those who don’t actively manage their S corporations, opting for no salary could legally enhance deductions. This unique strategy requires meticulous planning and professional advice to ensure it aligns with legal and tax standards.
Sole Proprietorship: The Simplified Option
For many, the straightforwardness of a sole proprietorship offers a clear, potentially more advantageous route for the Section 199A deduction, especially suitable for certain income levels.
Why It Matters to Your Business
Understanding and effectively leveraging the Section 199A deduction can dramatically improve your business’s financial health. Whether finding the optimal salary in an S corporation or utilizing the simplicity of a sole proprietorship, strategic decisions are key to unlocking significant tax savings.
Navigating these tax strategies shouldn’t be a solo journey. Schedule a tax assessment with us! Just click the link below or call us at (408) 708-9330.