There has not been a tax preparation shake up as big as the recently passed Tax Cuts and Jobs Act (Sec. 199A) since President Reagan was in office. A change this big will certainly alter the way your tax return looks, particularly if you are a small business owner since many of the tax updates for 2018 target businesses. Although change is rarely easy, the transition can be smoother when you know what’s coming, plan to make the changes work for you, and prepare your business.
The Deduction Conundrum
An important business provision in the Tax Cuts and Jobs Act is pass-through income deductions. A pass-through entity can take a 20% deduction (subject to limitations) on business income, unless it is a service business or a business operated outside the U.S. Limitations abound, though. In the attempt to simplify, here are the key points for business owners:
- Business income that passes through to an individual from a pass-through entity and income attributable to a sole proprietorship will be taxed at individual tax rates, less a deduction of up to 20%.
- If your taxable income is below the threshold amount ($157,500 for individual taxpayers and $315,000 for married taxpayers filing jointly), the deductible amount for each of your businesses is 20% of your Qualified Business Income (QBI). And this is regardless of the services classification rule.
- If you are above the threshold amount, you are dubbed a “high-income taxpayer,” and you are subject to limitations and exceptions. These are determined by your occupation and a wage limit.
- If you are a specified service business and your taxable income exceeds the threshold amount, plus the phase-in range ($207,500 for individual taxpayers and $415,000 for married taxpayers filing jointly), you lose the deduction completely. The old pass-through rules will apply – you pay using your individual tax rate.
- For all other non-service businesses, if your taxable income exceeds the threshold, the wage limits begin to kick in. The wage (and capital) limit applies fully for a taxpayer when taxable income exceeds the threshold amount, plus the phase-in range.
- Your deduction cannot exceed your taxable income for the year. If your net QBI is a loss, you’ll carry it forward as a loss to the next tax year.
Tax Return Takeaways
Possibly the biggest takeaway for business owners to keep in mind is that these deductions from income reduce your taxable income on your individual tax return. How you calculate your business tax will not change and business expenses are still deductible.
Between thresholds, deductions, QBI and limitations, you likely have some questions about the best way to prepare for your 2018 business tax return. Stableford Capital tax services can help you prepare like a pro to make sure you both comply with and maximize the benefits of the changes. To ask questions, plan or prepare your taxes, enlist Stableford Capital tax services by calling our main tax line at 480.998.0911.