The husband and wife team behind Will Johnson Building Co. recently learned that they qualified for a North Carolina tax break that would save them at least $3,875.
The money was a welcome surprise for owners Laurie and Will Johnson, who plowed through their savings to keep their custom homebuilding and remodeling business in Chapel Hill afloat during the recession.
“Truthfully, I just said it was a gift from God,” said Laurie Johnson, who serves as secretary and treasurer of the family business,
The Johnsons are among hundreds of thousands of business owners who could qualify for a state income tax deduction on their personal income tax returns.
Effective Jan. 1 2012, the law allows sole proprietors and active shareholders of S corporations, partnerships and limited liability companies to deduct up to $50,000 of active net business income on their personal state income tax returns.
Tax professionals say many small-business owners and self-employed contractors don’t know about the tax break.
“It’s the best-kept secret there has been,” said J.A. Lesemann Jr., managing member of the Huntersville firm Lesemann & Associates and chair of the N.C. Association of Certified Public Accountants.
The deduction doesn’t apply to passive income, such as certain types of real estate and other investments, income claimed on Form W-2, and owners who aren’t active in the business.
The deduction can be found on the North Carolina individual tax return form D-400 on line 48, which is labeled “Adjustment for net business income that is not considered passive income.”
“If it was late at night or you are in a hurry, you might just glance right past it,” said Ward Simmons, a Charlotte certified public accountant and owner of Ward Simmons CPA, P.A.
Small business owners also need to make sure they don’t underestimate or overestimate their income that qualifies for the deduction, tax professionals say. The maximum that an individual could claim is about $3,875 and some married couples could claim double that.
Husband and wife S corporation shareholders can claim up to $100,000 in a net business income deduction, but only if revenue they receive from the business parallels that amount.
A surprise for many
Susan Shackelford, a freelance writer and editor based in Charlotte, said she would use the tax savings on a long-term care insurance policy or dental work.
While Shackelford is grateful, she was shocked to learn about the tax break given the state’s budget challenges. Shackelford said she is concerned about a lack of funding for essential services such as education and Medicaid.
“Given the straits that our state is in financially, I was just very, very surprised that was a tax break,” she said.
The N.C. General Assembly Fiscal Research Division estimated that the tax would cost the state about $336 million in revenue.
The division estimated 750,000 tax filers would qualify for the deduction, but only 450,000 would be able to use it due to business losses.
Tax professionals say some small-business owners may want to consider taking steps to maximize their tax benefit in 2013 by reducing the wages they pay themselves to increase an S corporation’s net revenue, or increasing a spouse’s share in the business.
Small-business owners should consult tax professionals to understand any implications of any changes, but changes should be made quickly, said Neely McLaughlin, a partner with accounting firm Blackman & Sloop in Raleigh.
“The earlier the better,” said McLaughlin, because the net income is generally determined by the number of days they own the business.
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