Dallas, Texas, January 2018– With the passage of the “Tax Cuts and Jobs Act”, we now have major tax changes for the first since the Bush era tax cuts in 2003. Several provisions will help both large and small businesses. The largest benefit results in a new deduction for Qualified Business Income (QBI).
For years, a deduction has been available to certain businesses based on a concept of Domestic Production Activities Deduction (DPAD). This deduction has now been repealed and is being replaced by an expanded deduction from QBI. Many businesses that would have failed to qualify for a deduction under the DPAD are now eligible to qualify for a deduction under the QBI.
This new deduction is available to Partnerships, S Corporations, Trusts, Estates and Sole Proprietorships. It is a reduction of the individual owner’s taxable income for the lessor of:
- 20% of QBI,
- 50% wages paid to employees, or
- 20% of individual taxable income.
Small business owners are not forgotten. If the taxpayer’s taxable income does not exceed $315,000 (Married Filing Joint) for the year, the wages limitation noted above does not apply. So, for those sole business owners with no employees, they will still be able to qualify for this deduction and get some relief.
Not all this news is rosy, as there are some catches to the new deduction:
- Any business that involves the performance of services in the fields of health, law, accounting, financial services, investing, or where the principal asset of the business is the reputation or skill of one or more employees, would not qualify to take this deduction. So yes, your CPA, would not be able to use this deduction.
- Reasonable Compensation or Guaranteed Payments paid to owners of the business will not qualify as wages that count towards the total wages for the 50% limit.
- Businesses that are profitable, above certain income limits, and those who do not have employees would not be able to take advantage of this deduction.
- A qualified business loss in one year will be carried forward and counted against future calculations of QBI.
Businesses that are capital intensive and do not have many employees, find relief as well. As part of the final changes that came out of the conference committee, an alternative to the 50% wages limitation was added. This alternative would change the wage limit calculation to 25% of wages paid, plus 2.5% of the unadjusted basis of qualified property. The addition of the 2.5% deduction limit opened the opportunity for real estate businesses to join in on the increased deductions.
If you have questions about how provisions of the new law will affect you, please consult the Howard team and we will be happy to walk through your specific situation. Howard aims to share valuable insight that can help you prepare for the months ahead on your personal returns, as well as in businesses so we encourage you to visit the news section of our website where we will continue to post updates and announcements.
Howard, LLP is a Dallas-based accounting firm that has provided valued financial consulting, audit, assurance and tax services to individuals and businesses across multiple industries for nearly 40 years. The Howard team takes pride in helping both domestic and international clients achieve financial goals and peace of mind by resolving their toughest, most complex financial issues. Howard professionals are more than just CPAs; they’re insightful problem solvers and trusted advisors. Additional information about the firm can be found at www.howard-cpas.com.
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