Corporations were not the only businesses to receive a tax cut from the Tax Cuts and Jobs Act signed into law on Dec. 22, 2017. The Qualified Business Income Deduction, Section 199A of the act, allows owners of sole proprietorships, partnerships, LLCs and S corporations to deduct up to 20 percent of the income earned by the business. In the United States, more than 70 percent of businesses are sole proprietorships and 10 percent are partnerships. Therefore, this could be a significant deduction for many businesses in the Texarkana area. Generally, net taxable income for QBID purposes is taxable business income less capital gains and dividends.
The Good News: If the net taxable income is less than $315,000 for married taxpayers filing jointly or $157,500 for a single filer, the deduction is 20 percent of the lesser of Qualified Business Income or taxable income from all sources. For example, if a single taxpayer whose only income is from a sole proprietor has a total taxable income of $100,000, he or she would be able to deduct $20,000 2.
The Bad News: Things become complicated if the taxable income exceeds the first threshold of $315,000 for married taxpayers filing jointly or $157,500 for a single filer. The taxpayer can still receive a deduction but there are a variety of limits based on W2 wages paid, the adjusted basis of qualifying property used in the business and the type of business income.
Service Business Income: The main intent of the QBI deduction is to give tax benefits to businesses that hire W2 wage earners. It was not meant as a deduction for high-income professionals whose income comes from their own services. As a result, if taxable income exceeds the initial income threshold, many service businesses are treated differently from other businesses. IRC Section 199A defines service businesses as "any trade or business involving the performance of services in the fields of health, law, accounting, actuarial services, performing arts consulting, athletics, financial services, brokerage services, or any trade of business where the principal asset of such trade or business is the reputation or skill or 1 or more of its employees." The QBI deduction may be partially or fully phased out for high-income service business earners.
There is an interesting exception to the service business definition: Engineers and architects clearly are a "business where the principal asset of such trade or business is the reputation or skill or 1 or more of its employees," but they are explicitly excluded in the act. Architectural and engineering businesses may be given this advantage due to expiration of the 9 percent domestic production activities deduction for which they previously qualified.
Don't Fear: The deduction can be complicated to calculate, but your CPA knows how to wade through all of the tests and limitations to get the highest deduction for you.
Dr. Joan Brumm is a professor of accounting at Texas A&M University-Texarkana.