…said No Taxpayer EVER!
Luckily, We Do!!
Well, I’m sure by now you have heard of the new Tax Law that became effective January 1, 2018. This new law makes a plethora of changes to the tax code, some permanent and some that will expire on December 31, 2025. Fortunately, tax returns prepared in early 2018 for tax year 2017 will generally not be affected by the new law.
Simplification of the Tax Code? Perhaps, for some individuals. However, for those with small businesses such as a sole proprietorship, partnership, S-Corporation, Estate, & Trust, there is a deduction known as the 199A “Qualified Business Income Deduction” under which a non-corporate taxpayer that has qualified business income is allowed to deduct:
- The lesser of: (a) the “combined qualified business income amount” of the taxpayer, or (b) 20% of the excess, if any, of the taxable income of the taxpayer for the tax year over the sum of net capital gain and the aggregate amount of the qualified cooperative dividends of the taxpayer for the tax year; plus
- The lesser of: (i) 20% of the aggregate amount of the qualified cooperative dividends of the taxpayer for the tax year, or (ii) taxable income (reduced by the net capital gain) of the taxpayer for the tax year.
The “combined qualified business income amount” means, for any tax year, an amount equal to: (i) the deductible amount for each qualified trade or business of the taxpayer (defined as 20% of the taxpayer’s QBI subject to the W-2 wage limit; see below); plus (ii) 20% of the aggregate amount of qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership income of the taxpayer for the tax year.
The 20% deduction is not allowed in computing adjusted gross income (AGI), but rather is allowed as a deduction reducing taxable income.
Limitations. Except as provided below, the deduction cannot exceed the greater of:
- 50% of the W-2 wages with respect to the qualified trade or business (“W-2 wage limit”), or
- The sum of 25% of the W-2 wages paid with respect to the qualified trade or business plus 2.5% of the unadjusted basis, immediately after acquisition, of all “qualified property.” Qualified property is defined as meaning tangible, depreciable property which is held by and available for use in the qualified trade or business at the close of the tax year, which is used at any point during the tax year in the production of qualified business income, and the depreciable period for which has not ended before the close of the tax year.
Tip: Item # 2 above is expected to benefit people who own businesses with large real estate holdings but have few actual employees.
Tip: Because of the threshold amounts, certain married taxpayers may find it beneficial to file separate returns.
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Monday, I will post highlights from the new Tax Law that have not been widely discussed in the media & some useful tips!
As always, Thank you for reading my blog!