How will the new 20% business tax deduction affect your small business?
On August 8th, the IRS issued their proposed regulations for the 20% deduction for businesses. This new tax deduction will benefit many small business owners.
The deduction -- referred to as the Section 199A deduction or the deduction for qualified business income (QBI) – is a new provision which will allow many owners of sole proprietorships, partnerships, trusts and S corporations to deduct 20 percent of their qualified business income. The proposed regulations are designed to clear up some of the confusion from the ambiguity in the legislation.
The new deduction was created by the Tax Cuts and Jobs Act and is generally available to eligible taxpayers whose 2018 taxable incomes fall below $315,000 for joint returns and $157,500 for other taxpayers. In simple terms it will generally be equal to 20 percent of their qualified business income. If the taxpayer’s income enters the phase out zone of $315,000-$415,000 for joint returns and $157,500 - $257,500 for all others, there are several limiting factors. Additionally, if you’re in a specified service trade or business (SSBT) such as the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, investing and investment management, or trading, your deduction will be eliminated if your income exceeds $257,000/$415,000.
You can’t claim your W-2 wages as business income and the IRS has already stated that shifting from an employee to contractor while performing the same job won’t allow you to take the deduction either.
If you have any questions about the impact to your business, contact us and we can discuss where your business stands.