The Tax Cuts and Jobs Act passed in December, 2017 included a big help for many small businesses with the new Section 199A Deduction. Owners of any business that is not taxed as a C-corporation are eligible to deduct up to 20% of the net income passed through to them from their business.
The biggest winners are individuals with taxable income under $157,500 and couples filing jointly with taxable income under $315,000. Taxpayers in this category get a deduction of up to 20% of their Qualified Business Income (QBI). This deduction can’t be greater than 20% of their total taxable income minus net capital gains.
QBI is net ordinary income earned by a sole proprietorship, S-corporation or partnership. It does not include W-2 wages, guaranteed payments or investment-type income such as interest, dividends or capital gains.
Taxpayers whose taxable income falls under the threshold amounts get the full 20% deduction, regardless of what type of business they have.
When taxable income is over the $157,500/$315,000 thresholds, limitations kick in and the calculation becomes more complex. For businesses in certain trades, the deduction phases out quickly and is completely gone when taxable income reaches $207,500 for singles, $415,000 for joint filers. These trades include health, law, consulting, athletics, and financial or brokerage services.
For other types of businesses, the deduction is limited to 50% of the allocated share of W-2 wages paid by the business. For capital-intensive businesses, the limit is 25% of the allocated share of W-2 wages plus 2.5% of the allocated share of the unadjusted basis of tangible depreciable property owned by the business.
Calculating this deduction is not straightforward, and the type of entity can have a dramatic impact on the deduction you get. We encourage business owners to call our office and see how this deduction would impact your taxes under different scenarios. Call our office today to set up a meeting so we can help you determine the best way forward for your business!