NEW FOR 2019
Changes in the tax law resulted in a new deduction for certain businesses. Eligible taxpayers can claim this deduction for the first time when they file their 2018 federal income tax return in 2019.
Owners of eligible sole proprietorships, partnerships, trusts and S corporations may be able to deduct up to 20 percent of the following:
• Qualified business income from a domestic sole proprietorship, partnership, S corporation, trust or estate.
• Combined qualified real estate investment trust dividends and qualified publicly traded partnership income.
The deduction allows eligible taxpayers to deduct up to 20 percent of their qualified business income (QBI), plus 20 percent of qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income. The deduction is available, regardless of whether taxpayers itemize deductions on Schedule A or take the standard deduction.
The deduction has two components.
1. QBI Component. This component of the deduction equals 20 percent of QBI from a domestic business operation. The QBI Component is subject to limitations, depending on the taxpayer’s taxable income.
2. REIT/PTP Component. This component of the deduction equals 20 percent of qualified REIT dividends and qualified PTP income. This component is not limited by W-2 wages. Depending on the taxpayer’s taxable income, the amount of PTP income that qualifies may be limited.
QBI does not include items such as:
• Items that are not properly includable in taxable income
• Investment items such as capital gains or losses or dividends
• Interest income not properly allocable to a trade or business
• Wage income
• Income that is not effectively connected with the conduct of business within the United States
• Commodities transactions or foreign currency gains or losses
• Certain dividends and payments in lieu of dividends
• Income, loss, or deductions from notional principal contracts
• Annuities, unless received in connection with the trade or business
• Amounts received as reasonable compensation from an S corporation
• Amounts received as guaranteed payments from a partnership
• Payments received by a partner for services other than in a capacity as a partner
• Qualified REIT dividends
• PTP income
This deduction comes with an income limit where it starts to phase in. Also, if the business is generating W-2’s to employees it changes the formula to figure the amount of the deduction. The threshold amount is $157,500 ($315,000 MFJ). Taxpayers below the threshold amount are not subject to the W-2 wage limit.
W-2 Wage Limit:
1. 50% of the W-2 wages with respect to the qualified trade or business; or
2. 25% of the W-2 wages with respect to the qualified trade or business, plus 2.5% of the unadjusted basis immediately after acquisition of all qualified property.
This deduction lowers the taxpayers Adjusted Gross Income and therefore decreases his tax liability.
We are here to help the business figure how to take this deduction. Call us at (989)859-0346 or email us at Taxes@micottagellc.com for an appointment.