The new tax law enacted December 22, 2017, by the Trump administration changed the way businesses can qualify for tax deductions. Though the new law was geared toward supporting businesses, lack of knowledge around deduction requirements could leave you paying more than last year. While there are some great online tax tools that can help you, you may want to consult with a professional accountant if your taxes are complicated.
One critical section in the Tax Cuts and Jobs Act is 199A, the deduction for qualified business income (QBI). 199A was implemented to assist partnerships, limited liability companies (LLCs), S corporations, trusts, estates, and sole proprietorships.
Fundamentally, the deduction is the sum of 20% of the QBI of the taxpayer's qualified business. QBI is the net amount of income, gain, deduction, and loss with respect to any qualified business of the taxpayer.
For example, Jeremiah and Whitney file a joint return on which they report taxable income of $310,000, of which $10,000 is net capital gain and $300,000 is ordinary net income from Jeremiah's interest in an S corporation. Jeremiah's and Whitney's combined QBI is $60,000 (20% × QBI of $300,000). Jeremiah and Whitney's 199A deduction is $60,000.
However, the full calculation involves a multistep process that may phase out some or all of the deduction, it is advised that you consult a financial professional when calculating your QBI.
Requirements that may affect your eligibility include:
• Your taxable income thresholds
• If your business qualifies
• If you are in a loss year
• How many qualified businesses you own
• W-2 wage and capital limitations
The motivation in implementing 199A was to free up additional capital enabling businesses to grow. However, taking advantage of the tax cut will require proactive and precise planning; especially as more administrative guidance is further issued defining the law’s parameters. With over 35 years of experience in tax and estate planning, we are equipped to help you structure your financial systems to take advantage of the new law within the context of your overarching wealth strategies. By starting the conversation today with your WMBC Wealth Advisor you can receive the benefits of genuine financial advice and assurance of properly implemented tax strategies.
*Information source: https://www.journalofaccountancy.com/issues/2018/may/sec-199a-deduction-for-qualified-business-income.html
