One of the best changes, and definitely one of the more difficult regulations to qualify for that came out of the Tax Cut and Jobs Act of 2017 is the Qualified Business Income Deduction for passthrough entities.
Generally, a Qualified Business with Qualified Business Income that passes the Limitations assigned by the Section 199A is allowed a 20% deduction of their Qualified Business Income (QBI) from their Sole-Proprietorship, or Limited Lability Company (LLC) when it is treated as a single member LLC on Sch. C, Partnership, or an S-corp.
When does it go in affect?
Section – 199A will affect tax years of 2018-2025.
What is a Qualified Business?
Must be a “Trade or Business” other than specified service trade or business, or the trade or business of performing services as an employee.
What is a Specified Service trade or Business?
Any trade or business involving the performances of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal assets of such trade or business is the reputation or skill of 1 or more of its employees or owners. Also includes certain trade or business involving investing and investment management, trading, or dealing in securities, partnership interests, or commodities.
Engineers and Architects don’t fall under the definition of a Specified Service Trade or Business, and therefore are treated as Qualified Business for the purposes of Section 199A.
What Income would Qualify from a Qualified Business?
Income that is “Effectively Connected” to the trade or business in US. Certain Investments items including capital gains are excluded.
Compensation to taxpayer is excluded
Special loss recapture rules apply.
What Limitations are there to the deduction?
W-2 and Property Limitations
The 20% deduction shall not exceed 50% of W-2 wages, or
25% of W-2 wages and 2.5% of “qualified property” which ever is higher.
Taxable Income Limitations
Deduction cannot exceed 20% of Taxable Income reduced by the capital gains for the taxable year.
20% deduction does NOT apply to:
Self Employment Taxes
Net Investment Income Tax
Are there any Exceptions to the General Rule?
Yes, Service Businesses may be treated as qualified businesses if taxpayer’s income is under certain threshold amounts.
A specified service trade or business will be considered a qualified trade or business if the taxpayer’s taxable income is less than $315,000 for joint filers or $157,500 for all others.The limitations do not apply if the taxpayer’s income is under the above stated income thresholds.
These thresholds will be adjusted for Inflation, and the Qualifications and Limitations will phase in for taxpayers with income exceeding the above thresholds. With a complete phase-in at $415,000 for joint filers and $207,500 for all others.
For more information see IRC Sec. 199A
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