By Dave Garrett, CPA, CGMA If you operate your business as a sole proprietorship, partnership, or S corporation, your 2018 income from these businesses can qualify for some or all of the new 20 percent deduction.
You also can qualify for the new 20 percent 2018 tax deduction on the income you receive from your real estate investments, publicly-traded partnerships, real estate investment trusts (REITs), and qualified cooperatives.
To qualify for the 20 percent with almost no complications, you need two things: First, you need qualified business income from one of the sources above to which you can apply the 20 percent. Second, to avoid complications, you need “defined taxable income” of:
- $315,000 or less if married filing a joint return, or
- $157,500 or less if filing as a single taxpayer.
If your income exceeds these thresholds, the law provides for a reduction in the deduction which is referred to as the “Phaseout, Phase-in Range”.
What is the Phaseout, Phase In Range?
- For the single taxpayer, the taxable income phaseout, phase-in range is the $50,000 between $157,500 and $207,500.
- For the married filing jointly taxpayer, the taxable income phaseout, phase-in range is the $100,000 between $315,000 and $415,000
Example. You are single and operate your business as a proprietorship. It produces $150,000 of qualified business income. Your other income and deductions result in defined taxable income of $153,000. You qualify for a deduction of $30,000 ($150,000 x 20 percent).
If you operate your business as a partnership or S corporation and you have the qualified business income and defined taxable income numbers above, you qualify for the same $30,000 deduction. The same is true if your income comes from a rental property, real estate investment trust or limited partnership.
If your taxable income is greater than $207,500 (single) or $415,000 (married), you don’t qualify for the Section 199A deduction unless you have wages or property. Then the formula for the qualified business income deduction for that income is the lesser of:
- 20 percent of your qualified business income, or,
- the greater of (a) 50 percent of that business’ W-2 wages or (b) the sum of 25 percent of the W-2 wages, plus 2.5 percent of the unadjusted basis immediately after acquisition of all that business’ qualified property.
Example. Your business is not a personal service business. Your qualified business income is $345,000 and the business pays $100,000 in W-2 wages and owns no property.
Before considering the phase-in, your tentative deductions are the following:
- $69,000 (20 percent of $345,000 qualified business income)
- $50,000 (50 percent of W-2 wages)
Your phase-in is 30 percent. You have $30,000 over the $315,000 threshold, which gives you 30 percent of the $100,000 phase-in range. You take the $19,000 difference between $69,000 and $50,000 and multiply that by 30 percent to get your phase-in amount of $5,700. Your Section 199A deduction is $63,300 ($69,000 – $5,700).
If your income exceeds $207,500 single and $415,000 married joint, your deduction would be $50,000.
Understanding this deduction can be confusing. For assistance determining how tax reform impacts your business, contact Alerding CPA Group at 317-569-4181 or www.alerdingcpagroup.com.
This post was written by:
David W. Garrett, CPA, CGMA
As a Director at Alerding CPA Group, Dave oversees our tax practice while also providing tax advice, planning, support and compliance services for closely-held businesses and their owners. He has over 25 years of public accounting experience focusing primarily in serving closely-held companies with accounting, corporate structure, financing, taxation and operational issues.
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