Although the new tax bill (Tax Cuts and Job Act) was supposed to simplify things, some folks are doubting that these days. One provision, Section 199A, the 20% pass-through tax deduction for certain business entities, has given rise to many questions. The IRS did put out some clarifying information in August that should help, but confusion remains. Here are some of the questions often raised.
Basically, the business entities that can take advantage of the 20% tax reduction are sole proprietorships, partnerships, limited liability companies, S corporations, trusts, and estates. The deduction also applies to Real Estate Investment Trust (REIT) dividends. But it's a lot more complicated than that. There are income limits involved.
The full deduction can generally be taken on qualifying income up to $157,500 for any specified single taxpayer filing entity, or up to $315,000 for a couple filing jointly. Above those levels, a reduced deduction can be taken for amounts up to $207,500 and $415,000, respectively. But further restrictions as to the type of business apply when in this area of reduced deduction.
Service businesses which operate as experts whose main product is service or advice can take the full deduction this year if their income falls in the lower levels mentioned above. However, if their income is above those levels, up to the phase-out levels of $207,500 and $415,000 respectively, the deduction is reduced by specified amounts. These are businesses in areas such as law, accounting, engineering, athletics, and financial or brokerage services. But there are numerous fine distinctions here, so consult your CPA. Another restriction is the amount of W-2 wages paid. A limitation or exception also applies to the unadjusted basis of qualified property newly acquired and held.
This short, bare-bones outline of the rules of the pass-through deduction is, of necessity, simplified. For any particular situation, the advice of a tax professional is definitely warranted. The sun is setting on possible tax action in 2018, but there is still time left for business entities to take advantage of the new 20% tax deduction this year and to plan for next year. The best time to act is right now, however. Contact Foster Financial CPA for more information.