Why 2018 Could Be the Best Year Ever to Start Your Own Business
The Tax Cuts and Jobs Act introduced in Congress in 2017 will result in the most significant tax change since the 1986 Internal Revenue Code amendments. One of the changes is a brand-new provision of the tax law – section 199A, which introduces a 20% deduction for qualified business income (QBI). What is so unique about this new section? It’s not targeting just one specific industry or a group of businesses; all taxpayers reporting qualified business income from pass-through entities on schedule C of their individual income tax returns can take advantage of this code section, assuming certain requirements are met. Section 199A deduction will have significant implications for a large number of independent professionals. Just like many other provisions of the Internal Revenue Code, section 199A has its caveats and limitations. It is very important to research the IRS guidance and to compute your 199A deduction correctly before claiming it on your 2018 individual income tax return. On one hand, 199A can be very beneficial to taxpayers, on the other hand claiming this deduction requires a solid understanding of the provisions of this new law and the terminology it introduces. Section 199A is a new deduction from income for pass-through business entities. Pass-through entities are such forms of businesses that allow the income to be passed through to the personal income tax returns of its members. Pass-through entities primarily include partnerships, S Corporations and Sole Proprietors. Generally, 199A language states that 20% of the business income that is passed through to the individual income tax return will be deducted. This deduction applies to the returns filed for the tax years from 2018 through 2025. Nonetheless, 199A will not be available for some groups of professionals. Doctors, lawyers, accountants, athletes and some other groups of service providers are facing stricter limits on the amount of deduction they can take. The full 20% deduction is applicable to the first $315,000 of such qualified business income for married individuals filing jointly or $157,500 for individuals filing single. Once a taxpayer reaches these income thresholds, the deduction decreases (phases out) gradually until it’s eliminated completely at QBI of $415,000 for married or $157,500 for single filers. 199A is a new and complex code section and it has several other limitations. In order to arrive at an accurate 199A amount you’ll have to consider numerous factors in your calculation (determine your combined qualified business income amount, determine whether your combined qualified business income exceeds 20% of the excess of your taxable income over the sum of any net capital gain, evaluate your W-2 wages and property of the business, etc.). IRS will be providing further guidance on Section 199A in the coming months. Further IRS regulation will bring more clarity on how to apply 199A, who will be eligible for this deduction and what type of income it will offset. To find out more and to discuss how we can help position your business proactively to take advantage of this new regulation, contact us today.
Disclaimer:
This article does not constitute a tax or legal advice. IRS will be providing further guidance later in 2018 on the changes outlined in The Tax Cuts and Jobs Act.