02/09/2018
Here is some information that we passed along to our clients, and wanted to pass this on to others as well. This letter is about the Tax Cuts and Job Act that will be taking effect in 2018. Please read below:
This letter is about a key provision in the Tax Cuts and Jobs Act (the Act) that is a new tax deduction taking effect in 2018. It may provide a substantial tax benefit to individuals with "qualified business income" from a partnership, S corporation, LLC, or sole proprietorship. This income is sometimes referred to as "pass-through" income.
The deduction is 20% of your "qualified business income (QBI)" from a partnership, S corporation, or sole proprietorship, defined as the net amount of items of income, gain, deduction, and loss with respect to your trade or business. The business must be conducted within the U.S. to qualify. Specified investment-related items are not included, e.g., capital gains or losses, dividends, and interest income (unless the interest is properly allocable to the business). QBI does not include being an employee, reasonable compensation received from an S corporation, or a guaranteed payment received from a partnership for services provided to a partnership's business.
The deduction is taken "below the line," i.e., it reduces your taxable income but not your adjusted gross income. But it is available regardless of whether you itemize deductions or take the standard deduction. In general, the deduction cannot exceed 20% of the excess of your taxable income over net capital gain. If QBI is less than zero it is treated as a loss from a qualified business in the following year.
There are, of course, rules in place (discussed below) to deter high-income taxpayers from attempting to convert wages or other compensation for personal services into income eligible for the deduction.
For taxpayers with taxable income above $157,500 ($315,000 for joint filers), an exclusion from QBI of income from "specified service" trades or businesses is phased IN. The phase-in applies to trades or businesses involving the performance of services in the fields of health, law, consulting, athletics, financial or brokerage services, or where the principal asset is the reputation or skill of one or more employees or owners. This phase-in limits the deduction based either on wages paid or wages paid plus a capital element. The formula for how it works is below.
However, this is the area in which you will want us to assist you when planning for how much deduction you can expect to have. If your taxable income as a married couple is at least $100,000 above the threshold, i.e.,
$415,000 ($315,000 + $100,000), your deduction for QBI cannot exceed the greater of:
(1) 50% of your allocable share of the W-2 wages paid with respect to the qualified trade or business, or
(2) the sum of 25% of such wages plus 2.5% of the unadjusted basis immediately after acquisition of tangible depreciable property used in the business (including real estate).
So if your QBI were $100,000, leading to a deduction of $20,000 (20% of
$100,000), but the greater of (1) or (2) above were only $16,000, your deduction would be limited to $16,000.
Other limitations may apply in certain circumstances, e.g., for taxpayers with qualified cooperative dividends, qualified real estate investment trust (REIT) dividends, or income from publicly traded partnerships.
Obviously, the complexities surrounding this substantial new deduction can be formidable, especially when your taxable income exceeds the thresholds discussed above. We would like to work through the mechanics of the deduction with you so that you can appropriately and quickly act in 2018 to give yourself the best opportunity to take advantage of this deduction. If you are open to this analysis, please contact a WMET professional.
Very truly yours,
Wilsey Meyer Eatmon Tate PLLC
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