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The introduction of the Tax Cuts and Jobs Act (TCJA) brought with it a brand-new pass-through tax deduction for owners of pass-through business entities such as partners in partnerships, shareholders in S corporations, members of limited liability companies (LLCs) and sole proprietors. Our New York city tax accountant office can help you better understand the impact of these new deductions. Please contact us for assistance.

We provide the following overview to help you get started in understanding these tax reform laws:

  • Owners of pass-through entities are effectively taxed on earnings at individual tax rates, similar to the way corporate owners are taxed on wages.
  • Under the TCJA, tax rates for individuals are divided into seven brackets, with a top tax rate of 37%.
  • C corporations will be taxed at a flat rate of 21%, which may be lower than a business owner’s individual rate.
  • The TCJA also introduced a deduction of up to 20% for pass-through entities on “qualified business income” (QBI), subject to certain limits and restrictions. QBI is defined as net income from a business, minus any compensation amounts and any investment income from the pass-through entity. Note that QBI is figured separately for each business activity rather than on a per-taxpayer basis.

On order to claim the the full 20% deduction you must meet two key IRS guidelines:

1. Your business must be a specified service business: This includes many businesses that provide a personal service other than engineering and architecture. If your taxable income exceeds a threshold of $157,500 for single filers and $315,000 for joint filers, the deduction is reduced pro-rata under the “phase-in rule.” The phase-in is complete when income reaches $207,500 for single filers and $415,000 for joint filers. Above these upper thresholds, you are disqualified from getting any deduction.

2. Wage and capital limit: The pass-through income deduction is limited to the greater of (a) 50% of W-2 wages for your business or (b) the sum of 25% of W-2 wages and 2.5% of the unadjusted basis of all qualified business property (i.e. depreciable property available for use in your business). This limit is phased in pro-rata based on the same income thresholds as those above.

Another thing to keep in mind: the deduction can’t exceed your taxable income for the year (reduced by net capital gain). If the net amount of your QBI is a loss, you can carry it forward to the next tax year.

This new deduction is quite complex. It is important to know how it applies to your unique situation. We can help you understand what you need to know. Please contact our New York CPA firm for assistance.