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Back Office Support & Business Advice

The New 20% business net profit deduction is easy if you stay under $315,000

Matt Collins, CPA, CFP

July 26, 2018

The Tax Cuts and Jobs Act (TCJA) provides a very favorable deduction for pass-through business owners that takes effect in 2018 called the Section 199A deduction. This deduction is available to pass-through business owners, such as a sole proprietor, limited liability company, partnership and S corporation. If the business owner meets certain requirements, the owner can deduct (exclude) up to 20% of qualified business income. There is no better tax deduction than one that can reduce taxable income without having to spend money.

The new Section 199A can be very complex and there is a tremendous amount of uncertainty regarding who actually qualifies for this new deduction. But the new 20% business net profit deduction can be really simple if your tax situation matches the following:

1.       You are a taxpayer other than a C corporation that owns a Sole-proprietorship, S corporation, LLC (not treated as a C corporation) or Partnership.

2.       You are a taxpayer with income taxed at ordinary income tax rates

3.       Your taxable income is LESS than $315,000 for married filing joint taxpayers (MFJ) or $157,500 for all others.

If you meet all three of the above criteria, you can deduct 20% of your qualified business income. Simple as that! There is no need to worry about the other complexities of the new Section 199A deduction that include: 

·         Is the business a “specified service business”? Waiting on further clarification from the government on what this means.

·         You get a partial deduction when your taxable income is $315,000 (MFJ); $157,500 (all others) or more but less than $415,000 (MFJ); $207,500 (all others)

·         No deduction when you are a “specified service business” and your taxable income is $415,000 (MFJ); $207,500 (all others) or more.

·         Your deduction is subject to limitations when you are not a “specified service business” and your taxable income is $415,000 (MFJ); $207,500 (all others) or more.

Keep it simple! You need a plan to keep taxable income under $315,000 (MFJ) or $157,500 (all others). If you can do this and you have qualified business income, you will have a federal tax deduction of up to 20% of your business income.

   

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