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Beginning to Understand the 20 Percent Pass Through Deduction

Tax attorneys and CPAs across the nation are beginning to understand the 20 percent pass through deduction contained within the recent tax reform, but it will still be months before the final law will be written and the IRS will weigh in on how it will actually be put into use.  However, most business owners are hungry for information about the impact of pass through income changes and how it might affect not only the structure of their business entity but how they recognize “income” in the course of their business.

Under previous laws, generally speaking the owners of LLCs and S Corporations would “pass through” the income from their business to their owning members and shareholders who were subject to personal income tax rates as high as 39.6% in many cases.  This is not going to apply to every business, and it is too soon to rush out and form an LLC or make an S Corporation election thinking you’re in for a tax windfall.  As it is written, the new law appears to provide many business owners with a deduction of 20% of their income if they fall below the threshold of $157,500 for a single filer or $315,000 for married couples who file jointly.  Some believe all pass-through business owners will be able to take this deduction below the thresholds, but we will have to wait for the actual law to be published to know this for sure.

Just when you think you’re beginning to understand the 20 percent pass through deduction another development comes to light.  For those who exceed the thresholds the future is much more cloudy.  There are many limitations on the types of professions and service businesses who will qualify for the 20% deduction.  There also may be situations where your high-earning spouse may cause you to pass that deduction to another member or shareholder within your company (if any).

And perhaps, the biggest question of all: Which professionals will be excluded?  What businesses will fall under the bucket of ” 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 1 or more of its employees or owners.”  You might want to read that part of the law’s fine print again.

Just when you think you’re beginning to understand the 20 percent pass through deduction you are faced with a hard question: “What business ISN’T based upon the reputation or skill of 1 or more of its employees or owners?

If someone is telling you its time to act, you might consider finding someone else to listen to.  The fact is the law hasn’t even been finished, and the IRS hasn’t begun to weigh in on it.  Allen Barron’s experienced tax attorneys, CPAs and other tax, legal and accounting professionals are closely monitoring developments in order to provide up-to-the-minute advice for our clients.  We invite you to contact us or call 866-631-3470 for a free consultation to begin a conversation about your unique position and the genuine strategies to reduce your tax exposure and increase the amount you are able to keep for yourself after all of your hard work.  You can count on Allen Barron for accurate, expert insight on all business and tax matters.