The IRS recently announced various inflation-adjusted federal income tax amounts. Here’s a rundown of the amounts that are most likely to affect small businesses and their owners.

Rates and brackets

When discussing the inflation-adjusted tax amounts, let’s first begin with rates and brackets. If you run your business as a sole proprietorship or pass-through business entity (LLC, partnership, or S corporation), the business’s net ordinary income from operations is passed through to you and reported on your personal Form 1040. You then pay the individual federal income tax rates on that income.

Here are the inflation-adjusted tax bracket thresholds for 2024.

• 10% tax bracket: $0 to $11,600 for singles, $0 to $23,200 for married joint filers, $0 to $16,550 for heads of household;
• Beginning of the 12% bracket: $11,601 for singles, $23,201 for married joint filers, $16,551 for heads of household;
• Beginning of the 22% bracket: $47,151 for singles, $94,301 for married joint filers, $63,101 for heads of household;
• Beginning of the 24% bracket: $100,526 for singles, $201,051 for married joint filers, $100,501 for heads of household;
• Beginning of the 32% bracket: $191,951 for singles, $383,901 for married joint filers, $191,951 for heads of household;
• Beginning of the 35% bracket: $243,726 for singles, $487,451 for married joint filers, and $243,701 for heads of household; and
• Beginning of the 37% bracket: $609,351 for singles, $731,201 for married joint filers, and $609,351 for heads of household.

Key Point: These thresholds are about 5.4% higher than for 2023. That means that other things being equal, you can have about 5.4% more ordinary business income next year without owing more to Uncle Sam.

Section 1231 gains and qualified dividends

If you run your business as a sole proprietorship or a pass-through entity, and the business sells assets, you may have Section 1231 gains that passed through to you. You should include these on your personal Form 1040. Sec. 1231 gains are long-term gains from selling business assets that were held for more than one year. They are generally taxed at the same lower federal rates that apply to garden-variety long-term capital gains (LTCGs), such as stock sale gains. Here are the 2024 inflation-adjusted bracket thresholds that will generally apply to Sec. 1231 gains recognized by individual taxpayers.

• 0% tax bracket: $0 to $47,025 for singles, $0 to $94,050 for married joint filers, and $0 to $63,000 for heads of household;
• Beginning of the 15% bracket: $47,026 for singles, $94,051 for joint filers, $63,001 for heads of household; and
• Beginning of the 20% bracket: $518,901 for singles, $583,751 for married joint filers, and $551,351 for heads of household.

If you operate your business as a C corporation and the company pays you qualified dividends, the IRS taxes them at the lower LTCG rates. So, the 2024 rate brackets for qualified dividends paid to individual taxpayers will be the same as above.

Self-employment tax

If you operate your business as a sole proprietorship or as a pass-through entity, you probably have net self-employment (SE) income. You must report this on your personal Form 1040 to calculate your SE tax liability. For 2024, the maximum 15.3% SE tax rate will apply to the first $166,800 of net SE income (up from $160,200 for 2023).

Section 179 deductions

For tax years beginning in 2024, small businesses can potentially write off up to $1,220,000 of qualified asset additions in year one. This is up from $1,160,000 for 2023. However, the IRS can start to phase out the maximum deduction amount. This happens once qualified asset additions exceed $3,050,000 (up from $2,890,000 for 2023). Various limitations apply to Sec. 179 deductions.

Side Note: Under the first-year bonus depreciation break, you can deduct up to 60% of the cost of qualified asset additions placed in service in calendar year 2024. For 2023, you could deduct up to 80%.

Just the beginning

Only these 2024 inflation-adjusted amounts are likely to affect small businesses and their owners. There are others that may potentially apply. This includes limits on qualified business income deductions and business loss deductions, income limits on various favorable exceptions such as the right to use cash-method accounting, limits on how much you can contribute to your self-employed or company-sponsored tax-favored retirement account, limits on tax-free transportation allowances for employees, and limits on tax-free adoption assistance for employees.

Contact us with questions about your situation.