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.
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