Pass-Through Businesses May Receive
20 Percent Tax Deduction
2017 Tax Cuts and Jobs Act
Allows Certain Businesses a 20% Tax Deduction
The 2017 Tax Cuts and Jobs Act (TCJA) had several tax law changes enacted to help the business community generate more jobs and reduce their tax burden. When the TCJA was announced, the 20 percent deduction for pass-through entities was identified as the one most likely to significantly reduce the taxes paid by certain businesses. It was also identified as the one change that was the most difficult to determine as to whom would benefit from this change. As of this date, there are still many unknowns.
Some of the undefined concepts are (1) identifying the types of service businesses (health, law, accounting, consulting, etc.) whose benefits may be limited; (2) what are the distinguishing factors between owner-employee wages (subject to payroll taxes) and return on capital (which qualifies for the 20 per-cent deduction); (3) what exactly is a trade or business; (4) when must separate lines of business be grouped together as a single trade or business; (5) and how are revenues and expenses allocated and apportioned to arrive at the 20 per-cent deduction on qualified business income (QBI)? Once all of the terms are defined and quantified, a long series of calculations may need to be performed to compute the tax deduction which has phase-out limitations.
Notwithstanding the unknowns, here is what we know today:
Pass-through tax entities are sole proprietors (Sch. C filers), partnerships and S Corporations. C Corporations do not qualify for this deduction. The taxable income from pass-through entities are not taxed at the business legal entity, but rather pass-through (flow-through) to the individual taxpayer. Thus if your business is a pass-through tax entity, you may be entitled to this 20 per-cent tax deduction.
Here is some good news.
For an individual single taxpayer with taxable income below $157,500 on Form 1040, and for joint income tax return filers with taxable income below $315,000, there are no trade-or-business level wage-property limitations. Also, the aforementioned specified service businesses will qualify for this deduction. Thus most of these businesses will qualify for the 20 per-cent business deduction beginning with the 2018 calendar year.
For those of you whose Form 1040 taxable income exceeds the aforementioned taxable income thresholds, all may not be lost. You may still be entitled to a tax deduction. However, there are phase-out rules. For taxpayers in the phase-out range: between $157,500 and $207,500 for single filers and between $315,000 and $415,000 for other filers, the deduction for each trade or business that would otherwise be 20 per-cent of QBI is phased out. The phase-out computations add another layer of complexity to the prior calculations, and they are different for businesses that are specified service businesses and those that aren’t.
If your taxable income exceeds the threshold amounts of $157,500 and $315,000, it may be prudent to implement tax planning strategies after the IRS or Congress clarify their interpretation of the QBI deduction.
If you would like to discuss your business or personal tax planning, tax preparation and other financial concerns with an experienced tax professional, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.
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About F. Bryan Haarlander, EA, CTRS:
Bryan Haarlander is an IRS licensed Enrolled Agent and who owns and operates a specialized tax services firm serving clients in the western suburbs of Philadelphia, PA, which includes the cities of Chester Springs, Coatesville, Collegeville, Devon, Downingtown, Exton, Frazer, King of Prussia, Paoli, Philadelphia, Phoenixville, Pottstown, Radnor, Reading, Wayne, West Chester in Berks, Chester, Delaware, Montgomery and Philadelphia Counties, as well as clients in Delaware, New Jersey, New York and throughout the continental USA.
A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.
