Unlike larger corporations which will be taxed at a flat rate, small business owners have been asking, “How do the new tax rules affect pass-through entities?”
Pass-through income will continue to be taxed at individual income tax rates. Part of the reason you’re hearing about a potential tax break is because many small business owners may be eligible to deduct 20% of their pass-through income from their taxes, however.
This deduction brings a great deal of complexity, since—as you might have guessed—that deduction is subject to several limitations, restrictions, and rules of its own!
In simple terms, here are two examples of the limitations and complexities that impact your taxes this year:
#1: Restrictions based on your income.
The 20% deduction has limits based on a business owner’s taxable income. This threshold would be $157,500 for individual taxpayers and $315,000 for married taxpayers who file jointly.
In general, if your taxable income is below that threshold, the deductible amount for your business is 20% of your qualified business income (or QBI). There are other limitations related to this, too complex to describe here, so get in touch with us to learn more.
#2: Restrictions based on whether you are a specified service trade or business.
If you’re in the service industry, and the success of the business is reliant on you, you are typically going to be classified as a “specified service trade or business.” When your business is categorized this way, there are further restrictions on the 20% deduction, in particular if you are over the business income threshold. This category excludes engineering and architecture services, which is to their benefit.
These are two restrictions of many—simplified here to give you a preview of the kind of factors that affect who will be eligible and not eligible for this new 20% deduction.
What Else to Consider
Just like itemized deductions, this new business deduction is a below-the-line deduction; Both of these lower your taxable income as a small business owner, but not your AGI.
The good news is that as a small business owner you can claim the 20% QBI deduction in addition to the larger of the standard deduction or itemized deduction.
Helping You With 2018 Tax Planning
These changes to the business tax scheme are comprehensive and they can be complicated. Because of all the variations that exist, we will want to take a look at your business on an individual basis so we can determine what’s best for you and your organization.
If you have questions, or if you’d like to make an appointment to learn about your 2018 tax changes, call us at (513) 576-1989 . We’re looking forward to hearing from you.