Just Passing Through Edition
Tax Change Delights Part I

The tax law that went into effect 1/1/18 contains a major new business deduction (“199-A”) for self-employed folks and pass-through entities. The broad strokes are clear, the details are mind-boggling. Highlights:

• Applies to sole proprietors, S-Corps, partnerships…
• The net income of the business subject to tax at the individual owner level is reduced by 20%. So for S-Corps, partnerships and the like the deduction is taken not by the business but passed through to the shareholders or members.
• That deduction is taken “below the line” of adjusted gross income; therefore it does not reduce self-employment tax.income; therefore it does not reduce self-employment tax.
• Deduction phases out between $157,500 and $207,500 (single ) and between $315,000 and $415,000 (married filing joint) for owners and members of traditional service businesses like accountants, attorneys, consultants, financial service professionals and physicians and other specified professions. Again, these limitations kick in on the individual tax return level.

• For non-service businesses (as well as engineers and architects, even though they are service businesses), the “pass-through” recipients of the deduction are entitled to the full deduction up to $157,500/$315,000 as described above. Beyond those thresholds their ability to take the deduction is based on a complex formula related to wages paid to employees and depreciable assets owned by the business.
• “Section 199-A” applies to federal income tax. Whether it applies to your state income tax depends on your specific state’s income tax provisions.
• Rental income may qualify for the deduction, subject to the limitations discussed in #5 above, as well as other specific provisions beyond the scope of this article.
  Deduction was promoted as a boon to small business, but apparently some higher income taxpayers will also benefit.
• More complexities will apply!

Contact your tax professional for a more detailed analysis of how this complicated provision will impact your specific situation.