NEW

THE SMART BUSINESS OWNER’S LIST OF TAX DEDUCTIONS

For a business owner, taxes can be overwhelming and cumbersome. Tax deductions allow you to save thousands of dollars each year on your taxes and make tax filing a much more bearable experience. In this post, we'll list some of the tax deductions you can use to...

The Smart Business Owner’s List Of Tax Credits

One of the best ways to cut costs as a business owner is to take advantage of all the tax deductions and tax credits for which you're eligible. As a business owner, you're concerned with the bottom line--increasing your net profits. That probably means you spend most...

PRESS RELEASE: Cassidy Jakovickas, CPA of Fresno, CA Appointed to Intuit’s Accountant Council

Select Panel Advises on Products and Services that Accountants and Their Clients Want Most             FRESNO, CALIFORNIA – June 4, 2019 –Today, Intuit, Inc (Nasdaq: INTU) announced that Cassidy...

Beyond The Numbers: What We’ve Been Reading

Although our team loves using numbers and spreadsheets to help our clients make the best financial decisions, we also enjoy reading great books. Staying well read on both fiction and non-fiction books helps us hone our imagination and introduces us to new, sometimes...

Looking Back At April

It’s hard to believe that we’re at the end of April, but it’s true! This month, we helped our clients wrap up another great (and busy) tax season. There was, as always, a lot of paperwork, emails, and nail-biting involved in the days preceding April 15, but that’s all...

5 Last-Minute Tips For Filing Taxes in 2019

Well, April 15 is almost here, and the tax-related panic is thick. If you haven’t filed your 2018 tax paperwork and are rushing to get your taxes in by the deadline, we’ve decided to give you some last-minute tax advice that will hopefully help ease your stress....

An Introduction To Cybersecurity for Business Owners

Keeping your sensitive business and customer data secure has never been more critical. Whether you are a small business or a national corporation, you can't relax your defenses against those criminals seeking to take advantage of lazy cybersecurity policies. Virtually...

March News Roundup

Wow! It seems like we just started March and we’re already moving into April! As we move into the final stretch of tax season, we’re recapping this month’s news for you, just in case you missed it amid the tax-related hubbub. MBS Accountancy: November Review This...

4 Key Changes To Depreciation Under The TCJA

As the Tax Cuts and Job Act (TCJA) continues to be unraveled by tax professionals, it’s important to review the changes and their implications on business operations and tax strategies. In this article, we’ll highlight TCJA’s changes to first-year bonus depreciation,...

3 Ways A CPA Can Make Your Business Successful

It can often seem unnecessary to hire a certified public accountant (CPA) since bookkeepers and accountants are frequently believed to be the be-all-end-all for a business’ finances. However, there are certain advantages to having a CPA by your side. While we...

How To Calculate The Pass-Through Deduction For 2018

Reading Time: 3 minutes

Formally known as the Section 199A deduction, the “pass-through” deduction allows many sole proprietorships, partnerships, S corporations, trusts, or estates to deduct up to 20 percent of their qualified business income. Taxpayers who are eligible can also deduct up to 20 percent of their qualified real estate investment trust (REIT) dividends and publicly traded partnership income. Though this is a great opportunity for eligible taxpayers, it is important to understand the various nuances of this deduction so you avoid future impacts to your business.

Determine whether you are a “pass-through” entity

As the name implies, the passthrough deduction is for individuals that report their business income on their personal returns. These entities include:

  • Sole proprietorships
  • Partnerships.
  • S corporations.
  • Limited liability companies (LLCs)
  • Any S-corporation, trust, or partnership that owns interest in a “pass-through” entity

Determine whether you’re involved in a Qualified Trade or Business

The qualification for claiming the “pass-through” deduction is being involved in a qualified trade or business. According to Section 199A, any business or trade is eligible for the “pass-through” deduction, except for trades or businesses in which you perform services as an employee or any trades or businesses specified as excepted by the IRS.

Specified service trades or businesses (SSTB) are defined as any “trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, investing and investment management, trading, dealing in certain assets or any trade or business where the principal asset is the reputation or skill of one or more of its employees or owner (IRS.gov).” It’s important to note that this SSTB exception only applies if your taxable income exceeds the taxable income thresholds of $315,000 (for married taxpayers filing jointly) or $157,500 (for all other taxpayers).

Review your Qualified Business Income

After establishing whether or not you are involved in a qualified trade or business (and beneath the appropriate income threshold), you then need to determine your qualified business income (QBI). Qualified business income is basically the net income from any qualified business or service trade. Caveats to QBI are that the qualified items must be accounted for within the tax year and that the net income and its associated items (gains, losses, etc.) must be connected with the operation of a business or trade within the United States.

Items that are excluded from qualified business income are:

  • Capital gains or losses
  • Dividends or dividend-equivalent amounts
  • Interest income that isn’t properly allocable to a trade or business
  • Net income from transactions involving foreign currency or commodities
  • Income from notional principal contracts
  • Amounts from annuities that aren’t received in connection with a trade or business
  • Reasonable compensation paid to the taxpayer by any qualified trade or business of the taxpayer for services rendered in connection to the trade or business
  • Payments, as described in Section 707(a) or – for guaranteed payments – Section 707(c), that are made to a partner for services rendered with respect to the trade or business.
  • Any deductions or losses able to be allocated to any of the previous items in this list

Figure out whether your deduction is limited

After verifying the qualification of your business and income, there are two limitations that may affect your deduction amount: the W-2 Wage limitation and the Qualified Property limitation. These limitations only apply to individuals with taxable income (before the QBI deduction) that is within the thresholds mentioned earlier ($315,000 for married taxpayers filing jointly or $157,500 for all other taxpayers).

If your income is above these thresholds, after determining your qualified business income, you are to take the lesser amount between 20% of your QBI and the higher amount of either:

  1. 50% of the W-2 wages related to the qualified trade or business OR
  2. 25% of the W-2 wages related to the qualified trade or business plus 2.5% of the unadjusted basis following the acquisition of all qualified property connected to the qualified trade or business

To be clear, the Qualified Property limitation pertains to all tangible and depreciable property that meets the following criteria:

  • It’s owned and usable by the qualified trade or business at the end of the tax year
  • It was used to produced QBI during the tax year
  • Its depreciable period on or following the end of the tax year

Determine your final Qualified Business Income & deduction amounts

After calculating the QBI for each qualified business or trade, you are to consider your final QBI deduction amount as the lesser amount between (a) 20% of your net taxable income amount before the QBI deduction and (b) your combined QBI income from all qualified trades and businesses.

If you need help, let us know and we’ll be glad to help you!

Previous

Next

Submit a Comment

Your email address will not be published. Required fields are marked *