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The New Qualified Business Income Deduction: Tax reform’s small business bonus

Posted On: December 28, 2018  0 Comments

Your small business faces a lot of changes for the 2018 tax season. The loss of the entertainment expense deduction might sting, but for those who qualify the blow will be softened by a broader shiny new deduction.

What is it?

The new Qualified Business Income (QBI) Deduction introduced in the Tax Cuts and Jobs Act (TCJA) of 2017 is a deduction of up to 20% on domestic business income, available to those who operate a business directly or as a pass-through entity. The QBI deduction is not an itemized deduction and may be taken “below the line” in addition to the standard deduction on your personal tax return.

Who is eligible?

To qualify for the full 20%, your total 1040 taxable income must be below $157,500 if filing single or $315,000 for married filing jointly.

For income below the thresholds listed above, qualifying business types include:

  • Independent contractors
  • Sole proprietorships
  • S-corporations
  • Partnerships
  • LLC treated as a sole proprietorship or partnership for tax purposes
  • Real estate investment trusts
  • Other Trusts and estates

If your income is above these thresholds, complex limitations and phaseouts come into play. The deduction also becomes limited for certain trades and business types, and for incomes above $415,000 filing jointly, these specific business types are disqualified for any part of the deduction.

Summary of the exclusions listed in Section 199A of the TCJA: The businesses and trades excluded are those involved in performing services in health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, investing and investment management, trading, dealing in securities, partnership interests, or commodities, or any business where the principal asset is the reputation or skill of the owner or employees.

Consult your tax professional if you have questions about your eligibility.

How do I claim it?

Most of the data you need to calculate your deduction is already in the documentation you provide to your accountant to prepare your return. If you receive a Schedule K-1 from an S-corporation or a partnership, you will notice a new code in a box on your form associated with the QBI deduction. You will need this information to claim your deduction. If you receive your form without it, contact the issuing business for a correction to avoid a delay in submitting your return.

The 2018 tax season is going to be complicated as the IRS continues to trickle out clarifications related to various parts of the TCJA. Make an appointment with your tax preparer as soon as you have your books closed and documentation together. If you’re already a small business client of Bacon & Gendreau you’re in good hands! Call our office or email your tax professional if you have questions specific to your business.

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