Tax expert Eva Rosenberg fills you in on the highlights of the 20% tax deduction to provide some clarity on how it could affect your tax planning and the future of your small business.
Everyone is excited about the new deduction for small businesses. There’s a lot of planning going on to determine if folks need to incorporate, or dis-encorporate, or form partnerships, or get out of partnerships.
With the combination of lower personal tax rates and higher standard deductions; lower corporate tax rates (a flat fee of 21% on all profits); higher depreciation deductions; and the new Qualified Business Income (QBI) deduction (Sec. 199A), there are many moving parts to the decision. Don’t expect anyone to give you a quick and pat answer.
Highlights of the New Small Business Deduction
- A 20% deduction on pass-through or business income, which includes the following types of entities:
- K-1s (includes Scorps, estate and trusts, certain publicly traded partnerships, REITs & Coops dividends)
- Schedule C
- Schedule F
- This special deduction is not applicable to “Specified Trade or Service” income, if the taxpayer’s income exceeds these limits. There is a phase-out range. What does that phase-out range mean? It means that when your income exceeds the lower limit of the range, you start losing some of the deduction. You lose all the deduction when your income reaches the high point of the range.
- Married Filing Jointly – $315,000 – $415,000
- All other filing statuses – $157,500 – $207,500
- Further limitations on the computation: Use the lowest one of these numbers. You will need your tax pro to help you understand just how to arrive at each amount. It’s not as straightforward as it looks.
- Qualified Business Income
- W-2 Wages
- Qualified Property
- What is a Qualified Trade Business (QTB)? Any trade or business, other than a Specified Trade or Service Business which does not qualify and includes:
- Health, law, consulting, athletics, financial services, brokerage services. NOTE: The Conference Bill does not mention performing arts. Some tax professionals believe that industry might qualify. Engineering services and Architecture services are acceptable QTBs (so they must have had good lobbyists).
- Any trade or business where its principal asset is the reputation or skill of one or more of its employees or owners.
- Any trade or business that involves the performance of services that consist of investing and investment management trading, or dealing in securities/partnership.
- Trade or business of being an employee: The IRS may need to define this more clearly. Does this mean someone who gets a W-2? Or does this mean someone who was an employee and converts their job into self-employed status
- Rentals: We don’t know yet if they qualify. Most likely, actively managed rentals will qualify. Those rentals that are completely passive (with property managers or folks who just collect rent checks and provide no services) will probably not be eligible for the QBI.
As you can see, this is not a slam dunk computation or decision. When you do go to your tax planning appointment, bring last year’s financial statements and this year’s projected budget or financial statements. And give some thought to the future direction of your business. See Chapter 2 in Small Business Taxes Made Easy to help you with your latest business plan.
Known as TaxMama®, Eva Rosenberg’s frankness, sense of humor and casual, chatty delivery makes her a welcome talk show guest and speaker around the country. An Enrolled Agent, licensed by the IRS and the U.S. Treasury Department, Eva is the publisher of TaxMama.com, and the author of Ask TaxMama® and Small Business Taxes Made Easy. Her TaxQuips podcasts also keep people entertained and informed.