New Deduction for Small Business under the Tax Cuts and Jobs Act of 2017
January 5, 2018
Congress just passed the most sweeping tax reform since the 1980s – what does it mean for the small business owner?
The Tax Cuts and Jobs Act of 2017 (TCJA) provides a new deduction for business income from pass-thru entities. But, your small business must either pay wages or own qualified business property.
WHO GETS THE DEDUCTION?
Individual taxpayers who are Sole proprietors, LLC members, S-Corporation shareholders, and partners of partnerships are all considered “Pass-Thru Entities” for purposes of the TCJA.
C-Corporations are not. But, the C-Corporation tax rate was reduced to 21%. Whether or not an S-Corp should convert back to a C-Corp is another subject we will discuss in the future but at this point, for small closely held businesses, it appears unlikely to be a savings.
HOW MUCH IS THE DEDUCTION?
20% of “qualified business income” from the pass-thru entity.
IS THERE A CAP?
Yes. For personal service businesses (lawyers, accountants, doctors) there is an income threshold cap of $157,500 for individuals and $315,000 for filing jointly. After that the deduction is not available. For some reason, engineers and architects did not get stuck with the cap (go figure, their lobby must be stronger than us). There is no income threshold for: manufacturing businesses, construction companies, and non-personal service corporations.
ARE THERE ANY REDUCTIONS?
Yes, possibly, based on the W-2 wages paid by the pass-thru entity and whether the business owns qualified property. Qualified business property is tangible personal or real property that can be depreciated under Section 167 of the Tax Code. The deduction is the lesser of 20% of qualified business income; or the greater of 50% of the W-2 wages paid by the pass-thru entity, or 25% of the wages paid by the pass-thru entity plus 2.5% of the unadjusted basis of qualified business property. This means that if the pass-thru entity pays no wages and owns no property, there is no deduction. If the pass-thru entity only pays wages, and owns no property the deduction is limited to 50% of those wages. If the pass-thru entity pays no wages and only owns property, the deduction is limited to 2.5% of the unadjusted basis of the property.
WHAT DOES THIS MEAN?
It means the taxable income for a small business owner could be lowered substantially. How much? Go to www.lawvex.info/deductions-calculator and download our free Calculator for the Qualified Business Income Deduction and take a look.
You can also find the entire text at: https://www.congress.gov/bill/115th-congress/house-bill/1/text
Gary Winter has been representing small businesses for over 12 years and is the Managing Attorney at Lawvex, a California law firm focused on serving small businesses with speed, efficiency and value. For a copy of the Calculator visit www.lawvex.info/deductions-calculator. To learn more about whether Lawvex could be a fit for your business, call (888)308-7003.
