One of the most significant (and complicated) provisions of the Tax Cuts and Jobs Act is the new deduction available for qualifying pass-through entities. Subject to limitations, the owner of a sole proprietorship, LLC (single or multi-member), S corporation, or partnership is granted a deduction equal to 20% of “qualified business income.”
The Fine Print
This sounds simple, but, in reality, it’s not. The 20% deduction is straightforward only if your taxable income is less than $315,000 (married) or $157,500 (single). If that’s the case, the deduction is 20% of qualified business income, and you pay tax on the remaining 80% regardless of your profession or entity structure.
If your taxable income exceeds the $315,000 / $157,500 amounts but is less than $415,000 / $207,500, the 20% deduction might be reduced to a smaller percentage based on the amount of W-2 wages paid by the business and/or property owned by the business. If taxable income exceeds $415,000 / $207,500, the 20% deduction could be reduced to a smaller percentage or even eliminated altogether based on the W-2 wages and/or property owned.
More Limitations for Certain Professionals
A second set of limitations applies to those in a “specified service trade or business.” This pertains to any business where the principal asset is the skill or reputation of one or more employees or owners. This includes law, health, accounting, services related to investment or investment management, and many others. It does not include engineering or architecture, which were specifically excluded.
If you’re in one of the services listed above, the 20% deduction might be partially allowed until taxable income reaches $207,500 (single) or $415,000 (married, filing jointly). If taxable income exceeds those amounts, no deduction is allowed.
We can help you work through the specifics of your unique situation under the new tax laws. Please give us a call to find out what we can do for you.