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The 20 Percent Deduction for Pass Through Income

The tax bill presented for the President’s signature contains the 20 Percent Deduction for pass through income for the majority of US partnerships, S Corporations and sole proprietorships.  Under existing tax law, business profits were passed through to the individual and taxed at their personal income rate.  The top individual income tax rate has been lowered from 39.6% to 37% and pass through owners, shareholders, partners and members will be able to take a 20 percent deduction for pass through income on their earnings.  This basically lowers the effective tax rate to 29.6%.

The 20 percent deduction for pass through income will impact many who claim business income here in San Diego and across the country.  Almost 40 million US taxpayers claimed pass through income on their individual returns for the last year this information was available (2014).   Due to the 20 percent deduction for pass through income, the legislature is positioning this bill as an incentive for individuals to find way to classify their earnings as business income in order to take advantage of the effective lower tax rate.  While there are limits on those who may take the 20 percent deduction for pass through income they do not become a factor until income exceeds $157,500 at an individual level or $315,000 for the majority of couples.

Many pass through businesses are self-employed individuals with no employees, as more than 75% of the pass through businesses analyzed by the Treasury Department were categorized as “non-employers” (claiming less than $10,000 in labor deductions).  The analysis also showed more than 70% of small business employers had adjusted gross income below $200,000 which means the majority of these taxpayers would be eligible for the 20% deduction for pass through income and therefore lower actual effective tax rates.

How will the 20 percent deduction for pass through income apply in your circumstances?  Do you need to restructure your business to take advantage of this opportunity?  Allen Barron is uniquely positioned to answer those questions and provide a thorough comprehensive analysis based upon our integrated tax, legal, business advisory and accounting services.  We invite you to contact us for a free consultation at 866-631-3470.