Twenty Percent Deduction for Small Business Owners

Beginning in tax year 2018 there is a new deduction for qualified business income of “Passthrough” entities. This is clearly aimed to benefit the small business owner. Although, it is based on qualified business income, the deduction will be taken on the business owner’s personal return.
So, two terms that we need to define. What is qualified business income? What is a “Passthrough” entity?
Qualified Business Income – This includes all kinds of business income. It includes the net income of a sole proprietor, net income from rental property and passthrough income on Schedule K-1s.
Owners of multiple businesses or rental properties will combine the income and losses to arrive at net qualified business income.
It does not include W-2 income (even if the W-2 income is from a passthrough entity owned by the taxpayer) or partner’s guaranteed payments. Serious tax planning is advised in 2018 for owners of S-Corporations, LLCs and partnerships.
Passthrough Entities – Eligible entities include sole proprietors, rental property owners, partnerships, S corporations, LLCs, trusts and estates.
The deduction is not available to C corporations or LLCs that are taxed as C corporations.
Where it will be deducted – The deduction will be reported on the 1040, page 2 below standard or itemized deductions line. It is allowed for both itemizers and non-itemizers. It only applies to federal income taxes and not for self-employment tax purposes
Deduction limitations and Phase Outs – The deduction is limited to 20 percent of the lesser of net business qualified business income or taxable income before the deduction. Adjustments to income and itemized or standard deduction will reduce the taxable income.
The deduction may be phased down based on the taxable income. For Married Filing Joint taxpayers, the phase-out starts are $315,000; for other filing statuses the phase-out starts at $157,500. The effect of the phase-out depends on whether the business is a “specified” service business or any other kind of business.
Tax planning is required early in the year to take advantage of this deduction.
Please contact me to schedule a free consultation to discuss your 2017 tax return and tax planning for 2018. For more information, you can email: steve@chegwincpa.com or call 661-253-0270.