How the Tax Reform Affects Pass-Through Businesses

On December 20th, 2017 one of the largest tax reform bill in recent decades was passed.  One significant change effects pass-through businesses, including sole-proprietorships, S corporations, and LLCs taxed as partnerships or S corporations. These businesses are classified as pass-through businesses if the owners report income from their businesses on their personal income tax returns.

Who Qualifies?

This deduction does limit the types of pass-through businesses that are eligible. Those unable to qualify for the deduction include “special service businesses” in the fields of health, law, consulting, athletics, financial services and brokerage services. Other “special service businesses” that are exempt from this deduction are reputation-based or skill-based businesses or those that involve investments, trade, or dealing in securities, partnership interests, or commodities. However, if these “special service businesses” qualify based on income less than $315,000 (for joint, married filers or $157,500 for single taxpayers), these business owners are able to claim the full deduction.  That means significant money saving!

How Much is the Deduction?

Owners of “pass-through business entities” will obtain the benefit of a 20% deduction from otherwise taxable income. With some limitations to who can claim the Qualified Business Income (QBI) deduction, it typically includes income, gain, deduction, and loss. The QBI does not include wages, dividends, investment interest income, capital gains, commodity gains, or foreign currency gains. The QBI also includes 20% of the taxpayer’s REIT dividends and qualified publicly traded income for owners of real estate and stock.

When is the Deduction Applicable?

This deduction is temporary and begins January 1, 2018, and “sunsets” or ends in the 2025 tax year.

For a more precise analysis of how the new tax law affects you and your business, please consult a tax advisor.

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