The new business tax break

By Sheryl Rowling

Sheryl Rowling

SAN DIEGO — Did you know that the Tax Cuts and Jobs Act (TCJA) has created a tax savings opportunity for businesses? If your business is not a C corporation, you might qualify for a 20 percent income reduction by means of the Qualified Business Income (QBI) deduction.

Although the rules are complex, it’s worth it to figure out – you could get a big tax savings!

The Basics

To qualify, your business can be any structure other than a C corporation, such as:

  • A sole proprietorship
  • A partnership
  • An S corporation
  • A single member LLC
  • A multi-member LLCs

As long as your taxable income is less than $315,000 for married couples or $157,500 for singles, you can claim a deduction for 20 percent of your net business income – up to a maximum of 20 percent of your taxable income less capital gains.

Example

George and Gracie have a flower shop that netted $150,000 in 2018. Their total taxable income is $200,000 (not counting capital gains). George and Gracie can deduct $30,000 from their taxable income (20% x $150,000).

Complications

If your taxable income is greater than these amounts, your deductions are limited depending on whether your business is a “service business” or not.

Service Business

If your business is a service business and you make more money than the above amounts, your deduction is limited:

  • Full deduction if taxable income is less than $315,000 for married couples or $157,500 for singles.
  • Phased out deduction for taxable income between $315,000 and $415,000 for married couples or between $157,500 and $207,500 for singles.
  • No deduction for taxable income above $415,000 for married couples or $207,500 for singles.

In other words, service businesses only get a benefit for the QBI deduction if total income is below $415,000 for married couples or $207,500 for singles.

A service business is defined as a business in the areas of:

  • Health
  • Law
  • Accounting
  • Actuarial science
  • Performing arts
  • Consulting
  • Athletics
  • Financial services
  • Brokerage services
  • Investing and investment management
  • Trading or dealing in securities, partnership interests or commodities

The TCJA exempts engineering and architectural businesses.

Non-Service Business

If your business is not a service business and you make more money than the above amounts, your deduction is limited to 20 percent of taxable income minus capital gains and cannot exceed:

  • 20 percent of QBI
  • Greater of 50% of W-2 wages or 25% of W-2 wages plus 2.5% of the cost of business assets acquired after 2008.

In other words, if you have high income, to claim the QBI deduction for a non-service business, you must pay wages and/or have substantial business assets.

Example

Ben owns an ice cream distribution business. Net income from the business is $250,000 and his total taxable income is $800,000. The business pays wages of $200,000 and has equipment (acquired after 2008) with an original cost of $500,000. Ben’s QBI deduction is limited to:

  • The lesser of 20% of business income or 20% of taxable income: $50,000
  • The $50,000 cannot exceed the greater of:
    • 50% of wages: $100,000, or
    • 25% of wages + 2.5% of business assets: $62,500

Ben’s deduction is $50,000. If Ben’s business income was $600,000, Ben’s QBI deduction would be:

  • The lesser of 20% of business income or 20% of taxable income: $120,000
  • The $50,000 cannot exceed the greater of:
    • 50% of wages: $100,000, or
    • 25% of wages + 2.5% of business assets: $62,500

In this case, Ben’s deduction is $100,000.

Conclusion

This article is a brief summary of the new QBI deduction rules. It should not be relied on to prepare your tax return; it should serve only as a guide to alert you of a possible tax benefit. If you believe the QBI deduction applies to you, be sure to consult with a knowledgeable CPA! This is an area of the tax law where a professional is absolutely needed.

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Rowling is a certified public accountant, personal finance specialist, and principal of Rowling & Associates. She may be contacted via sheryl.rowling@sdjewishworld.com