The Tax Cuts and Jobs Act which becomes effective in the 2018 tax year, translates into a potential 20% tax reduction for qualified business profit from pass-through entities such as s-corporations, limited liability companies, partnerships, and sole proprietorships.
To get the full deduction, business income should be less than $157,500 (if single) or $315,000 (if married).
No matter what type of business you’re running, taxpayers whose income is below these thresholds can take the 20% deduction with certain exceptions and modifications. The law specifies that certain service businesses, however, i.e. doctors, lawyers, actors, accountants, financial planners, etcetera, may not take the deduction if their income exceeds the thresholds stated above. Other types of business can with certain limitations.
The Qualified Business Income is one factor in determining the tax break. Another factor is your taxable income which is also utilized in determining your tax break. For example, since the deduction is determined with all your tax returns’ income, one partner could get the deduction while another in the same business may not because he or she has other income or additional spouses’ income that puts the partner over the threshold amount.
How To Claim The Deduction
To take the deduction, you don’t need to itemize. The 20% is applied against the Qualified Business Income (QBI). Qualified Business Income is determined under a fairly complex set of rules. The deduction is the greater of 50% of the W2 wages paid or the sum of 25% of wages plus 2.5% of the original cost of all qualified property.
The 20% tax break will cause many companies to consider reclassifying themselves as an S-Corporation or LLC in order to claim the tax break. Before you do that, know that taking money out of your corporation can cost you if not done properly. Your corporate bank accounts cannot be used as a personal checkbook. Doing so could cause your entity corporation or LLC to become disqualified or lose its charter. Owners should only pay business expenses through the business and take care to have proper records including an operating agreement and minutes, if appropriate.
Nolo Network has one of the web’s largest libraries of consumer-friendly legal information. They have an extensive and easy-to-understand explanation of The New Pass-Through Tax Deduction including real-world examples.
None of this simplifies tax filings. Feel free to post a comment (below), call us (215-342-4200), or fill out one of the contact forms on many of our pages if you have questions. We’re happy to help.