Dayton HRC

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.

Limitations

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
•    The sum of 25% of W-2 wages plus 2.5% of the cost of qualified property.

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.

We enjoy your questions, comments and suggestions for future topics. You may contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504. Or visit our website.

This week’s author – Mark Bradstreet, CPA

 

–until next week.

 

 

 

 

 

About the “Tax Tip of the Week” Series
We understand how difficult and frustrating the tax code can be. Bradstreet & Company created the “Tax Tip of the Week”  to serve-up weekly nuggets of tax tips to help keep you informed and engaged on the latest changes that might impact your taxes.Previous Tax Tips:

1.      New Tax Law Changes – Businesses

2.      New Tax Law Changes – Individuals

3.      Company Vehicles

4.      Happy New Year!

5.      Special Holiday Edition…

 

Copyright (C) 2010 Bradstreet & Company, Inc. All rights reserved.

Our firm (Focus 360, LLC) provides the information in this “Tax Tip of the Week” for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax tips in this e-mail are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided “as is,” with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.

Dayton address:
Bradstreet & Company, Inc. CPAs
388 Regency Ridge Dr.
Dayton, OH  45459
Telephone: 937-436-3133

Xenia address:
Bradstreet & Associates, Inc. CPAs
878 W. Second St.
Xenia, OH 45385
Telephone: 937-372-3504

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