The 2017 Tax Cuts and Jobs Act established the qualified business income deduction, which allows a deduction of up to 20% of qualified business income from a trade or business that is operated as a sole proprietorship, partnership, S-corporation, trust, or estate. This deduction is available for tax years beginning after December 31, 2017 and ending before January 1, 2026. The qualified business income deduction calculation can be complicated and cumbersome, and your deduction may be limited if your taxable income exceeds certain thresholds. The thresholds for the 2019 tax year are $321,400 for married filing joint; $160,725 for married filing separate; and $160,700 for single and head of household.
If the qualified business income is generated from a specified service trade or business and total taxable income exceeds the above-mentioned thresholds, no qualified business income deduction is available. However, if the qualified income generated is from a trade or business that is not a specified service business, there are additional thresholds and calculations to determine the amount of the qualified business income deduction that you are allowed. A specified service trade or business is defined as “any trade or business involving the performance of services in the field of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principle asset of such trade or business is the reputation or skill of one or more of its employees.” Excluded from this definition are architecture and engineering businesses.
If your taxable income will exceed the threshold, you should consider alternate planning strategies to reduce your taxable income which may allow you to receive some benefit from the qualified business income deduction.
The following are planning ideas that may be utilized to reduce taxable income:
If your taxable income is below the taxable income threshold amount, there are some planning opportunities to increase taxable income from the qualified trade or business, which would allow you to increase the amount of your qualified business income deduction.
When taxable income exceeds the thresholds for a non-specified service trade or business, the qualified business income deduction calculation is the lesser of:
20% of qualified income from the trade or business
The greater of 50% of the total W-2 wages from the business or;
25% of the total W-2 wages from the business plus 2.5% of the unadjusted basis of qualified property of the business
A few planning strategies to increase these amounts are:
If your trade or business is a real estate entity, safe harbor rules have been released which will allow real estate businesses to take advantage of the qualified business income deduction. A real estate trade or business will be considered a qualified trade or business if:
Rental real estate entities can elect to treat multiple rentals as one entity in order to meet the safe harbor rules, but you cannot mix commercial and residential properties for this election. Triple net leases and real estate used as a residence of the taxpayer do not qualify.
Every business and individual should be proactive and plan ahead in order to find opportunities to fully maximize their allowable qualified business income deduction. Now is the time to implement relevant strategies and tax planning ideas. If you have questions on how this deduction impacts you and your business, please contact RDG+Partners to request a review of your individual situation.
RDG+Partners wants to be the primary advisor for motivated business owners. The firm is committed to providing boutique level accounting, tax and business consulting services to the Rochester, NY community.