As a business owner, you’re likely aware that the Tax Cuts and Jobs Act (TCJA) brings forth substantial change to the tax code. You may hear rumors such as, “this is going to kill my business” or “no more tax on business owners”. But what does the TCJA actually mean for you and your business?
As the broadest sweeping change to the tax code in nearly 30 years, it’s important to consider the benefits and drawbacks of the TCJA. The most impactful change the TCJA introduced comes in the form of the Qualified Business Income (QBI) Deduction. This deduction allows business owners to exclude up to 20% of their business income from taxation. Too good to be true? Let’s explore.
Qualifying for the Deduction
Depending on a number of factors—including the nature of your business and your income level— you may be able to deduct up to 20% of the income that flows through your business to you. Businesses subject to this calculation are divided into two groups: (1) Specified Service Businesses and (2) Non-Specified Service Businesses. Specified Service Businesses include those in the following categories: Accounting, Financial Services, Attorneys, Celebrities, Consultants, and Health Care, among others. Businesses may be a Specified Service Business if they mainly provide professional services. The only professional services explicitly excluded from this definition are Engineers and Architects. Non-Specified Service Businesses are every other business line.
Irrespective of how your business is classified, application of the QBI Deduction is based on a measurement of “Taxable Income” (rather than “Adjusted Gross Income”). This means that the income thresholds used to evaluate the deduction come after itemized deductions.
Determining Your Deduction
Let’s start with income from Non-Specified Businesses. Depending on your taxable income, the amount of business income you can deduct is calculated as follows:
Here is how the deduction for income from a Specified Service business works:
While Specified Service Businesses don’t receive the same benefit as Non-Specified, thankfully these calculations apply to each business line individually—not as a whole. So, if you own multiple specified and non-specified businesses the calculations are applied to the income from each business. As an example, if a doctor owns a medical practice and has a non-related rental business, then the rental activity follows the Non-Specified formulas and the medical practice follows the Specified. First, the deduction is figured for each respective business. Then, another series of complex calculations are applied to reach your final deduction.
Whether you own a Specified or Non-Specified Business, the good news is that we are able to help you plan for this deduction and understand how it will affect you and your business. This is a huge topic of interest, and we will continue to monitor all developments to ensure our clients are maximizing the opportunity.
Feel free to reach out to us if you have any questions or would like additional information on this topic.
The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial advisor. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial advisor. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services.