20% deduction for Qualified Business Income effective for tax years beginning on or after January 1, 2018 !
The Tax Cut and Jobs Act (TCJA) Code Sec. 199A provides a 20% deduction on Qualified Business Income (QBI) from: Sole proprietorships, S corporations, Partnerships, and LLCs that are taxed as partnerships. QBI is defined as the net amount of qualified items of income, gain, deduction, and loss concerning the qualified trade and business of the taxpayer. It does not include qualified REIT dividends or publicly traded partnership income. These are eligible for a separately calculated 20% deduction outside of QBI deductions. The Code Sec. 199A QBI deduction is a deduction available to both itemizers and non-itemizers, and most importantly, can be claimed by individuals on their personal tax returns as a reduction of their taxable income! This deduction is active for tax years beginning after December 31, 2017 and before January 1, 2026. It is applicable to estates and trusts as well.
According to TCJA Code Sec 199A, a taxpayer’s deduction for qualified business income for the tax year is equal to the sum of the lesser of the combined QBI for the tax year OR an amount equal to 20% of taxable income (which is reduced by any net capital gain and qualified cooperative dividends) PLUS the lesser of 20% of the qualified cooperative dividends OR taxable income reduced by net capital gain.
Combined QBI includes an amount equal to 20% of the total amount of qualified REIT dividends and qualified publicly traded partnership income of the taxpayer for that tax year.
Additionally, Code Sec. 199A provides a special deduction to specified agricultural or horticultural cooperatives. (If this applies to you, please call our office to discuss it further at (732) 936-1230.)
That is a lot of technical information to take in. Here is where we make it a bit easier for you, a business owner, partner, member or S corporation shareholder taxpayer, to understand. Below is the three-step simplified process for calculating your QBI deduction:
• Calculate the QBI deduction of each of the qualifying trades or businesses
– The deductible amount for each qualified trade or business is the lesser of 20% of the taxpayer’s QBI OR the greater of 50% of the W-2 wages OR the sum of 25% of the W-2 wages and 2.5% of the unadjusted basis, immediately after obtaining all qualified property.
– The W-2 wage limitation is applied when calculating the QBI deduction and therefore the W-2 wages do not include any amount that cannot be properly allocated to the QBI as a qualified item of deduction AND any amount that was not properly included in a return filed with the Social Security Administration on or before the 60th day after the due date (including extensions). **These limitations exclude those in the health, law, accounting, broker, actuarial science, preforming arts, consulting, athletic, and financial services, deeming them not qualified trade or business.**
• Calculate the combined QBI amount
– Take the sum of the deductions from step 1, adjusted for any carryover qualified business loss (which means reduced by 20% of any carryover or loss but not reduced below zero) and add that to 20% of the total amount of the REIT dividends and qualified publicly trades partnership income.
• Determine whether the taxable income limitation applies
– There are caps on the QBI deduction at 20% of the taxable income. This makes the final deduction equal to the lesser of the combined QBI amount found in step 2 OR an amount equal to 20% of the taxpayer’s taxable income once it is reduced by any net capital gain.
Note that this deduction is not used in calculating adjusted gross income, thus it does not affect limitations based on adjusted gross income.
This 20% deduction is quite significant for the S Corporation shareholders, partners/members in partnerships, Limited Liability companies or Schedule C filers. The QBI deduction could reduce your individual marginal tax bracket or reduce your AGI so that you are now eligible for tax credits. One thing is for certain: if your business or K-1 has positive income, is not one of the “specified service trade or business” mentioned above, the QBI deduction will DEFINITELY reduce your federal income tax bill on your 2018 tax return!
For calendar year entities, tax planning before December 31st is a must! Make sure you take advantage of our tax planning expertise as soon as possible by calling and making an appointment to help your company maximize its tax savings. We are available Monday through Friday, 8:30 AM to 5 PM, at (732) 936-1230. We at Mazur and Associates look forward to hearing from you and helping you create the best and most tax efficient plan plan possible for the 2018 tax year!