New Tax Law – 20% Pass-through Business Deduction
Tax Tip of the Week | Jan 24, 2018 | No. 444 | New Tax Law – 20% Pass-through Business Deduction
For tax years beginning in 2018 and before 2026, the new 20% deduction is generally allowed by individuals, estates and trusts that have interests in pass-through business entities. These entities are sole proprietorships, partnerships, S corporations and limited liability companies (LLCs) and their income passes through and is taxed by another entity (generally taxed on your personal income tax return – Form 1040). This deduction will typically equal 20% of the qualified business income (QBI) provided personal taxable income is less than a threshold of $157,500 or, if married filing jointly, $315,000. Further limitations apply provided personal taxable income is in excess of these thresholds. Please note the QBI deduction isn’t allowed in calculating adjusted gross income (AGI), but it does reduce your overall taxable income. For all intents and purposes, QBI is treated as an additional deduction.
QBI is income, gains, deductions and losses that are connected with a U.S. business. Some investment items, reasonable compensation to an owner or any guaranteed payments to a partner or LLC member are not considered QBI.
For pass-through entities aside from sole proprietorships that exceed the above thresholds, the QBI deduction generally can’t exceed the greater of the owner’s share of:
• 50% of W-2 wages paid to employees by the qualified business during the tax year; or
Qualified property is the depreciable tangible property (including real estate) owned as of year-end and used by the business during the year for the production of qualified business income.
Another limitation is that the QBI deduction usually isn’t applicable for income from certain service businesses. These include businesses that involve investment-type services and most professional practices (exceptions are engineering and architecture).
Please note that other rules and limitations are applicable to the QBI deduction.
These rules are complex and will require careful planning to optimize any benefits.
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This week’s author – Mark Bradstreet, CPA
–until next week.
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