The biggest news about the Tax Cuts & Jobs Act (TCJA) that was recently passed by the U.S. Congress is that it has special deductions for business owners. If you have a partnership, sole proprietorship, and S corp, or an LLC, the new rules will give you something to be happy about. That's a rarity in tax law.
Here's what you need to know about the new regulations for owners of "pass-through" companies:
If you own a pass-through entity, then you can be taxed on earnings from that business at your personal rate, whatever bracket you happen to be in.
The big change has to do with a deduction on what the IRS calls "qualified business income." Namely, you can meet certain qualifications and thereby deduct up to 20 percent of your QBI. But keep in mind that there are hurdles in order to get this rather large deduction. The new law is so complex that many tax experts are still waiting to see how the IRS handles certain cases where the rules are somewhat ambiguous.
For single or married owners, if your business income is below $157,000/$315,000, then you can deduct 20 percent of it before paying tax on the total. Business income above those amounts is subject to a phase-out.
Generally speaking, if you are an engineer or an architect, you can't take the deduction at all. But if your business income falls below the thresholds, then you are okay to take it. Of course, high-earners in legal or medical professions will likely be hit by the phase-out due to high earnings. This is a case, because of the law's complex design, where you should speak with a tax professional in order to make sure that you are calculating the deduction correctly.
Note that the pass-through rules allow for a rather substantial amount to be subtracted from business income, as long as that income is the correct kind and is not above the stated limits. A married couple, for example, using the pass-through deduction could cut their final tax bill by as much as $23,000 if they meet the stated requirements and if their business earnings are all "qualified." This is a rather clear example of where hiring a tax professional pays for itself many times over. Rarely are there new tax laws that offer such huge deductions for individuals who own businesses.
Individuals who have questions about how the new tax reform law affects them or their business should seek professional guidance. It's not wise to miss deductions, or to make an expensive error.
At Flynn Financial Group Inc., the entire team is ready to serve everyone who seeks tax, accounting or consulting services, or those who have any questions about how the new tax reform rules impact their financial life. Call Continental at 401-846-6767, email them at bill@flynngroupinc.com, and check out their website for more information: http://www.wjflynncpa.com
Flynn Financial Group Inc