One of the biggest and most talked about changes in the Tax Cut and Jobs Act passed in December is the decrease of the business tax rates. If you are a business owner, I am sure you are wondering if you get a tax cut and if so, how much?
If you are a regular corporation, the new tax law changed the corporate tax rate to 21%. Prior to this bill passing, the corporate tax rate could be as high as 35%.
Most of the businesses I deal with, though, are considered pass through entities which include sole proprietors, partnerships, most LLC’s and “S” corporations. The tax break for pass through entities is a 20% deduction of the qualified business income. However, there are several limitations and calculations needed to determine if any deduction is allowed.
What is Qualified Business Income (QBI)? It is the non-investment income from a pass-through business. In other words, it is your business revenue less your business expenses. It does not include any interest or dividend income that you might earn due to investments that the business has. The deduction is 20% of the QBI. For example, if your net income for 2018 is $300,000, you would get a deduction of $60,000. Assuming your income was the same for 2017 and 2018, you would pay income tax on $300,000 in 2017, but only on $240,000 in 2018.
Well, that doesn’t see too complicated, does it? And it isn’t, if your (the business owner) taxable income is less than $315,00 for a married filing joint couple or $157,000 for a single filer. If income is below that amount, just take 20% of your QBI to get the amount of your deduction. Multiply the deduction amount by your income tax rate and you will see what your tax savings will be. However, if your taxable income is above the amount listed above, you will need to go through more tests and calculations involving the type of business you have, W-2 wages paid, and unadjusted basis. It can get complicated.
The QBI deduction is by far the most confusing piece of the new tax law. There are phase ins, phase outs, and at different levels, some businesses are not eligible for the deduction or will get a reduced deduction.
As you can see, the word “simplification” is not in the government’s vocabulary and that holds true for the pass through QBI deduction. The good news is that there is a 20% deduction, the bad news is that it is not easily calculated for all businesses. This is another good reason to be aware of your business income and do your planning throughout the year to not miss an opportunity for a larger deduction.
A little more about us:
Located in West Des Moines, Iowa with a branch office in Winterset, Iowa, McGowen, Hurst, Clark & Smith, P.C. celebrates 65 years of extending excellent service to our clients, providing them with accounting, auditing, consulting and investment expertise.
Established in 1946, our staff has grown from 3 to 60 employees, making us large enough to provide our clients with a broad base of experience and resources, yet small enough to offer very personalized service—which we feel makes us stand apart from other CPA firms. In addition to the traditional services of Accounting, Tax Preparation, Audit and Business Consulting, MHC&S offers our clients specialized services including Estate Planning, Business Valuations, Cost Segregation Studies, Retirement Planning, QuickBooks Training, Financial Advisory Services, Fraud Detection and Deterrence, Business Succession Planning, Litigation Support and more.
MHC&S is a member of CPAmerica International, Inc., a national association of accounting firms offering membership to only 90 firms throughout the United States. This association offers a wide pool of additional technical expertise to the members firms, as well as continuing professional education necessary to maintain the degree of excellence which MHC&S feels is vital in today’s business environment.