The new tax law has several provisions with multiple changes.
One area of significant change is for businesses and farms. There is a new 20 percent deduction for these pass-through entities.
As always, this message is a general education tool. For specific instances of how the tax law change may affect you and how to maximize your deduction, please schedule a meeting with your GBE advisor.
Terminology
Our accountants have been preparing for these tax law changes for some time now. Which means we are already using acronyms and descriptions in our day-to-day language. To catch you up to speed, here are a few terms to know:
- The Tax Cuts and Jobs Act (TCJA) – this is a reference to the new tax law package passed in December of 2017 which went into effect on January 1, 2018
- 199A – this is a reference to the new 20 percent deduction for businesses and farms (as allowed by Section 199A of the Internal Revenue Code)
- QBI – stands for Qualified Business Income
- QBID – this is also a reference to the new 20 percent deduction for businesses and farms based on profits (stands for QBI Deduction)
Who is Eligible for the QBI Deduction?
NOT employees. NOT C corporations. However, if you own a qualified trade or business operated directly or through a pass-through entity you may qualify for the deduction. Eligible taxpayers may be entitled to a deduction of up to 20 percent of QBI from a domestic business operated as a sole proprietorship, farm, partnership, S corporation, trust or estate.
Limitations
Deduction is limited to profit – thus showing a business or farm loss will not qualify you for a QBI deduction.
Additionally, for taxpayers with taxable income that exceeds $315,000 for a married couple filing a joint return, or $157,500 for all other taxpayers, the deduction is subject to limitations such as the type of trade or business, the taxpayer’s taxable income, the amount of W-2 wages paid by the trade or business, and the acquisition of qualified property held by the trade or business.
The QBI deduction is set to expire in 2026.
QBID is a Federal deduction only and is not recognized by most state tax laws. (top of page 5 of the report)
I’m Still Confused. Can You Summarize?
Generally speaking, if your business or farm has a profit in tax years 2018 through 2025 you will likely receive a new, favorable, Federal tax deduction. This deduction is extremely complex and time consuming to compute. There may be changes you need to make before the year is over to maximize your deduction.
Tax changes have arrived. The time to begin planning is now.