Only the Little People Pay Taxes

The last time I looked into the tax bill that Republicans were still jury-rigging through Congress, I was among those whose taxes will probably go up because we are losing the home office deduction. For years, that has sheltered most of my wife's teaching income. I  learned a few days ago that we can't deduct the interest on the home equity line of credit that replaced our mortgage several years ago, either, so that's another big hit. Between those two things, we almost surely can't itemize anymore. (If that's true, I'll save a few hundred bucks by buying TurboTax instead of hiring a CPA, so...silver lining?)  

Now that the corporate bonanza is almost law, I'm sure you're wondering how it affects Kraken Enterprises, so I ran some numbers to see if being a corporation and a small business owner might offset those losses. As an S corporation, Kraken's profit or loss goes on our personal 1040 as non-wage income. For the past several years Kraken delivered a nice, fat loss that gave us a nice, fat deduction, but this year it's going to show a  profit. I think that passing its profit through to its only shareholder makes Kraken a pass-through entity, although I'm still a little hazy on that definition. Massachusetts has a special tax form for pass-throughs that I determined a few years ago doesn't apply to me, although I can't remember why. If Kraken is a pass-through, then 20% of the profit should be excluded from taxation. 

The first draft of this post was dense with numbers working through different scenarios. Mercifully for you, I just deleted two pages of that and skipped to the conclusion: Kraken doesn't make enough money for the new rates to have much effect. Kraken's profit this year (actually Blue Hills' profit tempered by Curio City's loss, but the IRS only sees Kraken, not its operating companies) is going to be around $5,000. That means $1,000 of that should be non-taxable. A $1,000 exclusion is nowhere near what the home office and HELOC deductions were worth.

If I reduce my Blue Hills paychecks from 90% of income to 75% next year, thereby exchanging some salary for profit, I will pay less payroll tax throughout the year and get a bigger K-1 payout at year's end (and hence a larger exclusion). But Kraken would need to make at least 10 times as much money as it does, or cut payroll to a tiny fraction of income, to come anywhere near offsetting the deductions that we're losing...and I can't realistically survive on smaller paychecks while I wait for that year-end payout.  


In other words, the new tax regime was written to benefit bigger businesses and richer people. Surprise! But accountants and lawyers are just beginning to find new loopholes, so it might ultimately be a matter of just learning some new gimmicks. For example, if we could somehow change my wife's W-2 teaching income into 1099 income, and funnel that through Blue Hills, we'd be golden. I can't imagine the universities who employ her going along with that, but over the next few years we'll surely learn all kinds of new legal fictions to game the system. Maybe the corporation can pay some of the expenses, such as a percentage of our utility bills, that used to go into the home office deduction. 

With a little political luck maybe this train wreck will be cleared before it forces us all to change tracks.