One of the more complex changes from the Tax Cuts and Jobs Act is the ability to reduce taxable individual income for those who receive income from a pass-through business entity such as a sole proprietorship, partnership, S corporation or trust/estate. Recipients of income from one of these business entities may be able to reduce their tax liability with this new deduction. The calculation for the reduction in taxable income is based on the lower of 20% of the taxable income from the business or 20% of their individual taxable income. However, the final deduction takes into consideration the amount of individual taxable income and the type of business.
This deduction has been called the qualified business income deduction (QBID) or the 20% pass-through but is formally known as Code Section 199A. In general, to qualify for the full deduction, your taxable income must be below $157,500 if you’re single or $315,000 if filing a joint return Filers who are below those thresholds may take the deduction no matter what business they are in. If the business is a “specified service trade or business” then the deduction is not available for joint returns with income greater than $415,000 or $207,500 for all others.
A specified service trade or business is defined as being in one of the following professions: health, law, accounting, actuarial science, financial services, brokerage services or a business where the principal asset is the reputation or skill of the owner.
It is possible that two partners or shareholders in the same business may end up with different deduction amounts depending on their marital status and the income of their spouse if filing a joint return.
There are key decision that business owners may need to make about the type of tax entity. Are you better off staying as a sole proprietorship or S corporation or is now the time to think about treating the business as a C corporation for tax purposes? Contact our office to set up a time to review your business entity, look at the potential tax liabilities based on your business type and net income, and the effect on your individual income tax return.