Tag: tax deductions

  The Qualified Business Income Deduction is part of the recently revised business tax code. In this guest post,  leading author and tax expert, Barbara Weltman how business owners with multiple businesses can approach the QBI deduction. You can find more blogs by Barbara on her blog Big Ideas for Small Business.  The qualified business income (QBI) deduction provides a significant opportunity for business owners to slash their federal income tax bill. Designed to lower the effective tax rate on owners of pass-through entities, the write-off can be as much as 20% of QBI. But various limitations come into play that can reduce or bar the deduction.  For a basic primer on QBI, read my earlier post "Understanding The New Qualified Business Income Deduction."  If you are a business owner with an interest in multiple businesses,  you should read on. The good news is, you may be able to aggregate them to optimize their deduction. The bad news: certain businesses may not be able to break up in order to use the deduction, more on that part later. So here are some of the points to note in putting businesses together or taking them apart in order to get the biggest QBI deduction possible.   Aggregating businesses Usually, if you own businesses directly (a sole proprietorship or single-member limited liability company, or LLC) or have interests in S corporations, partnerships, or limited liability companies (LLCs), you figure the deduction for each business and then combine them for a single entry on your tax return. But you may be able to lump your business numbers together in figuring your QBI deduction. This may allow you to take a larger deduction than if you didn’t aggregate your business interests. If eligible, you can aggregate your interests, regardless of what your co-owners do with their interests. To qualify for aggregation, you must meet all 5 conditions: The same person or group of persons own (directly or indirectly) 50% or more of each business being aggregated. The 50% or more ownership exists for more than half the year. All tax items attributable to each business are reported on tax returns with the same tax year end (e.g., all businesses use a calendar year). None of the businesses are a specified service trade or business, or SSTB (any trade or business involving the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners). The businesses being aggregated satisfy at least 2 of these 3 requirements: (a) the businesses provide products and services that are the same (e.g., a restaurant and a food truck) or customarily provided together (e.g. a gas station and a car wash), (b) the businesses share facilities or significant centralized elements (e.g., personnel, accounting, legal, manufacturing, purchasing, human resources, or information technology services), and (c) the businesses operate in coordination with or reliance on each other (e.g., they have supply chain interdependencies). Other key points: Assuming eligibility, you can choose to aggregate some of your businesses and not others. The aggregation of businesses for purposes of the passive activity loss rules has no impact on aggregation for the QBI deduction. If one of the businesses being aggregated produces a negative QBI, each business with a positive QBI must be offset by a portion of the negative QBI. But W-2 wages and the unadjusted basis immediately after acquisition (UBIA) of qualified property from a business that has a negative QBI aren’t taken into account in figuring the QBI limitation. If there’s an overall negative QBI for the year, it is treated as a loss from a qualified business in the following year (the loss continues to haunt you). An election to aggregate businesses means they must continue to be aggregated in the future. New businesses can be added to the aggregated group. But if things change for businesses within the group (e.g., ownership drops below 50%), they may no longer qualify for aggregation. Each year you must attach to your return a statement identifying each business being aggregated. If you don’t, the IRS can “disaggregate” the businesses. Chopping up businesses Specified Service Trade Businesses's (SSTB's) with owners having high taxable income that would otherwise bar them from taking a QBI deduction may have thought they could separate out some functions in an attempt to qualify those separate parts as non-SSTBs. For example, it had been suggested to remove administrative functions or building ownership into a separate business to at least get the QBI deduction for this business. While having separate businesses is certainly allowed, the IRS has effectively killed the idea of chopping up businesses in certain situations in order to get the QBI deduction. An SSTB includes any trade or business with 50% or more common ownership that provides 80% or more of its property or services to an SSTB. If a trade or business has a 50% or more common ownership with an SSTB, to the extent it provides property or services to the commonly-owned SSTB, the portion of the property or services is treated as income from an SSTB. Even if a business would not otherwise be an SSTB but has 50% or more common ownership with an SSTB and shared expenses (e.g., wages, overhead expenses), it is treated as incidental to an SSTB if its gross receipts are modest. More specifically, the trade or business will be treated as an SSTB if its gross receipts represent no more than 5% of the gross receipts of the combined businesses. Bottom line The QBI deduction is a wonderful way to reduce your tax bill because it doesn’t cost you anything to get it (you don’t need to expend any money); it’s yours if you qualify. For the vast majority of business owners, the deduction is rather straightforward. But qualifying for the deduction becomes a complicated matter for anyone with taxable income over $315,000 on a joint return or $157,500 on any other return. Check with your tax advisor to learn more about how you can qualify for this write-off. Learn more about the QBI Deduction at our upcoming webinar with Barbara Weltman October 2nd.

      The IRS recently released more details about the Qualified Business Income Deduction, a new tax regulation that will impact small business owners. In this guest post,  leading author and tax expert, Barbara Weltman shares first impressions on the regulation and potential impact for small businesses. You can find more blogs by Barbara on her blog Big Ideas for Small Business.    If you own a pass-through entity—sole proprietorship, partnership, limited liability company, or S corporation—you may be eligible for a new tax deduction. It is a significant tax reduction for business owners who qualify for it. But it isn’t simple because numerous limitations and acronyms come into play. The following is a brief introduction to the qualified business income deduction.   Overview Referred to as the Section 199A deduction (the section in the Tax Code for it), the qualified business income (QBI) deduction runs from 2018 through 2025. You don’t have to expend any capital or take any special action; if you qualify for the deduction you get it. But the bad news is that there’s new terminology and calculations for limitations on the deduction which can be daunting. The deduction does not reduce your business income and does not reduce your net earnings for self-employment tax if you’re self-employed. It does not reduce your gross income as does other business-related expenses, such as retirement plan contributions on your behalf, health insurance for yourself, and one-half of self-employment tax. The deduction comes off your adjusted gross income in the same way as the standard deduction or itemized deductions (there’s a special line for the QBI deduction on Form 1040), effectively reducing the tax rate you pay on your business profits. For example, if you are in the 32% tax bracket and qualify for the deduction without any limitations, the effective tax rate on your QBI becomes 25.6%. What is QBI? The deduction is based on the amount of your qualified business income. This is essentially your profits from a pass-through trade or business. However, QBI does not include certain items that you do factor into your net income for determining what you pay income tax on. Items excluded from QBI are: Capital gains and losses (including Section 1231 gains) Dividend income Interest income Reasonable compensation paid to S corporation owner-employees Guaranteed payments to partners for services rendered to the business What is the QBI deduction? If your taxable income is no more than $157,500 if single or $315,000 if married filing jointly, then your deduction is 20% of QBI. The deduction cannot exceed your taxable income minus any capital gains. For example, if you are a sole proprietor with a net profit of $90,000 (and no excluded items) on your Schedule C and your taxable income is $100,000 (no capital gains), your QBI deduction is $18,000 ($90,000 x 20%). What limitations apply? Once your taxable income is higher than the taxable income threshold for your filing status, then various limitations come into play. The exact formula for determining the deduction (there are special rules for income from REITs and publicly traded partnerships that is not explained here) is the lesser of: 20% of your QBI, or The greater of (a) 50% of W-2 wages or (b) the sum of 25% of W-2 wages plus 2.5% of the unadjusted basis immediately after acquisition (UBIA) of qualified property. In addition to the W-2 limitation and the property limitation, there is a special limitation for a specified service trade or business (defined below). Only a percentage of QBI, W-2 wages, and the unadjusted basis of property can be taken into account. Once an owner of a specified service trade or business has taxable income over $207,500 if single, or $415,000 if married filing jointly, then this limitation means no deduction can be claimed. What are the special terms to know? There are a number of special terms you need to know in order to figure the deduction: W-2 wages. These are wages reported on W-2s to employees (including wages to S corporation owner-employees), plus elective deferral contributions to 401(k)s and similar plans and certain deferred compensation. Specified service trades or businesses (SSTBs). These are any trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners (a catchall category). Architecture and engineering are specifically not included in the list of fields. Fortunately, the IRS has narrowly construed the meaning of the catchall category so that the skill or reputation of an owner will be an SSTB only if the person receives payment for endorsing products or services, licensing the taxpayer’s images, or receiving fees for media appearances. For instance, a chef who owns restaurants and also endorses a line of cookware, only the income from the endorsement will be treated as an SSBT; the income from the restaurants won’t be tainted and subject to the SSBT limitation. Unadjusted basis immediately after acquisition (UBIA) of qualified property. This is essentially the cost of depreciable tangible property as of the date it’s placed in service. So if your sole proprietorship buys a $10,000 machine and begins to use it on March, 1, 2018, you have UBIA of $10,000, even if you write-off the entire cost on your 2018 return. Conclusion If you think the QBI deduction sounds complicated, then you are correct. Fortunately, the actual computation of the deduction is done automatically by software. The important concepts to understand are the overall landscape of the deduction and the new terms that come into play. An upcoming post will provide more guidance on grouping and splitting businesses and other aspects of this complicated but very important deduction. Stay tuned! Attend our webinar