We are constantly asked for additional information on pass through business income deductions in the new tax reform package. While new tax laws have yet to be formally published, there has been a significant change for those who file as a partner, member or sole proprietor which receives income from a pass through entity such as an S Corporation, Limited Liability Company (LLC), partnership or sole proprietorship. Typically, business income from pass through entities is reported on an individual’s federal tax return and therefore taxed at an individual rate. Many of these individuals will be able to take deduction of 20% of their qualified pass through business income from their gross income for tax years 2018 through 2025. The net effect of this deduction will be to lower the actual tax rate you must pay on the income you earn in qualifying pass through income entities.
There are substantial limitations, and one of the biggest remaining questions is who, precisely, will be excluded from this deduction. There are clear thresholds for this deduction and above certain income limitations the deduction is phased out completely. Some of the limitations include:
- $157,500 for single tax filers
- Single filers between $157,500 and $207,500 may be able to claim a partial pass through deduction
- $315,000 for those who are married filing jointly
- Joint married filers between $315,000 and $415,000 may be able to claim a partial pass through deduction
Once above these thresholds, the deduction will in most cases be limited to:
- 50% of the W-2 Wages reported by the business or
- 25% of the W-2 wages + 2.5% of the value of qualifying income generating property owned by the business which is depreciable
Many professions will be excluded from this deduction but the definition of these professions remains to be clarified by the IRS. We await this clarification as well as additional information on pass through business income deductions in the new tax reform package and how our clients may benefit from the new strategies. Allen Barron provides domestic and international tax planning and corporate structural and transaction advice as part of our integrated tax, legal, accounting and business advisory services. We invite you to contact us or call 866-631-3470 for a free consultation.