Written by: Marci Gietl, CPA
Under the new Tax Cuts and Jobs Act law (the Act), there is a significant new tax deduction taking effect in 2018 that may provide substantial tax benefit to individuals with “qualified business income” from a partnership, S corporation, LLC or sole proprietorship. Income from such entities is also referred to as “pass-through” income.
The deduction may be up to 20% of the “qualified business income” (QBI) from these entities. QBI is defined as the net amount of items of income, gain, deduction and loss with respect to the trade or business. The business must be conducted in the U.S. and specified investment-related items are not included [i.e., capital gains or losses, dividends and interest income (unless interest is properly allocable to the business)].
For taxpayers with income from “specified services” trades or businesses and total taxable income over certain levels depending on filing status, there are exclusions phased in that lead up to a level of complete disallowance of the deduction. These “specified services” trades or businesses include the performance of services in the fields of law, health, athletics, consulting, financial or brokerage services, or where the principal asset is the reputation or skill of one or more employees or owners.
Additionally for all taxpayers with incomes above established thresholds based on filing status, there’s a limitation on the deduction that’s tied to the wages of the entity or a combination of the wages and capital investment of the entity. The latter limit could be especially beneficial to real estate entities that have little to no wages but significant holdings.
The complexities of this new deduction are considerable, especially if your taxable income may be at or above the thresholds. If you’d like to learn more about this deduction and the potential impact on your tax situation, please contact us to discuss.