The Tax Cuts and Jobs Act was just signed into law by President Trump - what does this mean for small handmade sellers?
Firstly, it's important to emphasise that these changes are applicable for the next financial year onward (2018). For your 2017 tax return that is due by April 2018, all existing rules continue to apply.
The Hobby Expenses deduction is now gone
Firstly, the Hobby Expenses deduction has been repealed. This should only affect sellers that are not yet running their business as a profit making enterprise in the eyes of the IRS.
If you are selling your handmade products as a "hobby" - which basically means extremely low volume irregular sales, where you are selling your products at close to cost price - then this deduction will no longer be available on your Schedule A.
Any online selling activity in which the motive is to make a profit is deemed by the IRS to be a business - contrary to popular opinion, this applies no matter how much you are making in revenue. Most handmade and Etsy sellers will already be running as a legitimate business so the removal of this deduction is not likely to have an impact. If you're not yet treating your Etsy shop as a fully fledged business, then this is a good enough reason to start to get serious and get your bookkeeping into shape with Craftybase!
Can I still claim for expenses?
Expenses relating to the running of your business are all still claimable as before - this was a question that has been vexing many Etsy sellers. This misinformation stems from a misreading of the new bill: employees can no longer claim expenses attributable to the business of being an employee. As a craft entrepreneur, you are classed as self-employed and thus exempt from this ruling.
To clarify: if you are self-employed you can still claim stationery, office, postage and software expenses as you have done in the past. Your Schedule C expense deductions, including COGS remain unchanged.
If you are an employee, you cannot claim unreimbursed business expenses over 2% of your adjusted gross income.
Cuts for corporates and big business
Most of the meaty reforms in the tax bill are designed for larger corporate structures so will have little impact on craft microbusinesses - the slashing of the corporate rate in particular is one that most handmade sellers will not notice much at all.
Raised pass-through standard deduction
Most small businesses are organized as "pass-through entities" (this includes sole proprietorships, partnerships, limited liability companies, and S corporations - read more about the different business structures here).
A "pass-through" essentially means that instead of your business paying tax on its own income, the profit (or loss) is passed through to the owner, who reports it as their personal income. This does mean that the restructured personal tax brackets will have an impact on the amount of tax payable through pass-throughs so it is wise to review the new structure to see what your estimated liability will most likely look like next year.
The new tax act also raises the standard deduction to 20% for pass-through businesses until 2025.
Please note that tax laws change frequently. This information is for educational and informational purposes only should not be construed as tax or legal advice. Please consult a licensed financial expert in your area with specific questions or concerns.
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Topics covered include:
- Do I have to file if I’m just a hobby business?
- Common business structures
- Annual Income Tax
- Quarterly Estimated Taxes
- Sales Taxes
- State Income Taxes
- Bookkeeping Software
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