The TCJA, (Tax Cuts and Jobs Act) kicked into gear for better or for worse on January 1, 2018. Last week’s blog was about its impact on individuals and 1040s. This week is about business, specifically the Section 199A Qualified Business Deduction. Perhaps the biggest change to your business and individual taxes is the Section 199A.
Since a picture is worth 10,000 words, let’s start with a flow chart.
REINFORCING THE BASICS.
The Deduction. The gist of it is you may be able to deduct up to 20% of income your business earned depending on what your business is and how much taxable income you have sitting on your 1040 (thresholds and phaseout amounts). Are you above the amount, below the amount, or are you in between? You could get none, all, or some of that 20%.
Qualified Business (QB). You have a qualified business if you ARE NOT performing services as an employee; there is no 20% deduction off your W-2! And the business IS NOT classified as a specified service trade/business (SSTB).
Qualified Business Income (QBI). This is ordinary, non-investment income. For the most part, revenue – expenses = qualified business income. Do not include items like capital gains and losses whether short or long-term, non-trade or business interest income, and no foreign currency gains. Also, do not include S-Corp shareholder wages.
We thought maybe you could navigate the above flow chart and we’d fill in some details below.
First things first. Each qualified trade or business has its own tentative deductible amount starting at 20% of QBI. So, that means each Schedule C, each Schedule E, and each K-1. Then you either get the whole 20%, some of the 20%, or none of the 20% depending on your taxable income – the threshold/phaseout amount. And then if you get some of the 20% you have to do some math.
Taxpayer Other Than a C-Corp. A business that doesn’t pay tax at the business or entity level but passes it along to owners, partners, shareholders, and beneficiaries. Sole proprietorships, Schedule E rental properties, partnerships, limited liability companies, S-corps, and trusts and estates are all pass-through entities.
Taxable Income. All that money you made this year, whether you actively or passively earned it. Salary, bonus, commission, self-employment, gambling winnings, jury duty, rents, social security, IRA distributions, etc., less the nearly doubled standard deduction or your itemized deduction.
Ordinary Income Tax Rates. That’s that chart with percentages from last week’s blog. https://carolmcatee.com/2018/10/24/the-tcja-you-and-your-1040/
Are you a straight up qualified business or a specified service business? A specified service business has two parts. One or more employees/owners have to have mad skill at what they do and/or the reputation of the business has to be killer. Skill and reputation are the assets the IRS considers more important than buildings and inventory. Your Yelp reviews count more than your cash in the bank.
😭 Who is crying now?
Direct caregivers like doctors, dentists, pharmacists, nurses, dentists, veterinarians, physical therapists, psychologists, psychiatrists, and that whole crowd.
Lawyers, paralegals, arbitrators, mediators, and negotiators.
Accountants/CPAs, enrolled agents, tax return preparers, financial auditors, bookkeepers.
Actuaries and similar braniacs.
Financial services folks. All the financial advisors, investment bankers, and wealth and retirement planners.
Brokers who broker securities.
And pretty much everyone involved with investment and asset management and securities and commodities.
🏀🏈⚾🎾🎮🎬🎼🎸 Guess who else is crying? You get the idea, right!
😁 Who is Happy like a Boston Red Sox fan this year?
Health club and spa owners. Medical researchers and pharmaceutical sales reps.
Court reporters, stenographers, and couriers.
Not a single job in accounting is happy.
Analysts, economists, math whizzes, and statisticians who do anything but assess financial costs of risk.
Bankers are very happy.
Real estate brokers.
Real estate managers.
SSTBs owners with less than $157,500/$315,000 in taxable income.
🍀 Oh yeah; architects and engineers got really lucky. They are not SSTBs.
🦄🌈 If you own your own business/or are self-employed as a landscaper, painter, roofer, mechanic, photographer; if you own a restaurant, a store, a lemonade stand, just to name a few – You are not an SSTB. Be Happy! Unicorns and rainbows happy.
Partial Deduction. The partial deduction, as you see from the flowchart, comes in to play if you have taxable income BETWEEN $315,000 and $415,000 MFJ and BETWEEN $157,500 and $207,500 All Other Taxpayers (AOT). Between these thresholds it does not matter if you are an SSTB or not.
Calculating the Partial Deduction. Since you’re not gonna get the full 20%: Calculate 50% of the QB’s W-2 wages (including S-corp shareholders), then, calculate 25% of W-2 wages + 2.5% unadjusted basis of Qualified Property. The bigger amount factors into your partial deduction.
Qualified Property (QP). For the most part, think of your fixed assets that you own and depreciate: buildings, improvements, vehicles, computer items, etc.
Subject to Limitation. The subject to limitation, as you see from the flowchart, comes in to play if you have taxable income MORE THAN $415,000 MFJ and MORE THAN $207,500 AOT.
Calculating the Subject to Limitation. Similar to calculating the partial deduction.
WHAT ELSE SHOULD I KNOW?
⇒ This may seem pretty simple; believe us, it is anything but. Net losses, S-corp officer salaries and reasonable compensation, multiple QBs, among quite a few other things are complications.
⇒ If you’re worried about your skills or your rep being everything you have and disqualifying you from the Section 199A deduction, as long as you’re not famous and you don’t provide “Who’s Crying Now” services you are good to go.
⇒ You may want to reassess payroll strategies and even business formation types.
⇒ The K-1s from your pass-through entity will include QBI and allocable share of W-2 wages & QP to transfer to your 1040.
If you are wondering if you are an SSTB or need to SWAG your taxable income for 2018, reach out to McAtee and Associates for answers and guidance. Carol McAtee would enjoy navigating Section 199A and tax planning with you.
firstname.lastname@example.org OR 727-327-1999.
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