As 2018 closes out it’s time to move into year-end tax planning, and examine tax savings opportunities. Helpful in this process is the fact that Business owners now have some clarity when it comes to taking advantage of the significant tax break opportunities folded into the Tax Cut and Jobs Act (“TCJA”).
The TCJA was signed into law in December of 2017, but it has only been since August that guidance has come from the IRS regarding the “pass-through deduction.” Specifically, how US taxpayers can take advantage of the 20 percent deduction on Qualified Business Income (QBI) for owners, partners, and shareholders in those pass-through entities, such as S-Corps, LLCs, partnerships, and sole proprietorships.
The deduction now is generally 20% of a taxpayer’s 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 the trade or business.
Further, that deduction for a business cannot exceed the greater of:
- 25% of W-2 wages paid as well as 2.5% of the Unadjusted Basis Immediately After Acquisition (UBIA) of property used by the business or trade.
- 50% of wages.
As for the taxpayer, the deduction claimed must be the lesser of:
- The sum of the combined amounts described for each trade or business.
- 20% of the excess of taxable income over the net capital gain of the taxpayer.
Some important types of investment-related items excluded from a business’s QBI are:
- Capital gains or losses.
- Interest income (some exceptions apply).The proposed regulations provide further guidance as it relates to a trade or business by limiting the meaning of “reputation or skill” where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners.
Here are a few examples of what qualifies in these scenarios:
- Income from endorsements.
- Licensing or income from the use of an individual’s image, likeness, name, etc. Basically, any symbol associated with the individual’s identity.
- Appearance fees, or income (including appearance on television, social media, or other forums.)
Finally, there is now more information regarding Specified Service Trades or Businesses (SSTB), specifically, what does not qualify as an SSTB. This is relevant to taxpayers in service-related businesses, such as healthcare professionals, law, accounting, actuarial science, performing artists, consulting, athletics, financial services, brokerage services, including investing and investment management, trading, or dealing in securities, partnership interests, or commodities, and any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees are eligible. The proposed regulations indicate that a trade or business is not an SSTB if:
- The trade or business has gross receipts of $25 million or less in a tax year and less than 10% of the gross receipts of the trade or business is attributable to the performance of services in an SSTB.
- The services are provided by real estate agents and brokers, or insurance agents and brokers. However, it does include services provided by stock brokers and other similar professionals.
While the new guidance from the IRS certainly provides clarity, it does not make it simple. If you have any questions or want to speak with an RMG tax professional, click here.