We understand, taxes are hard. That's why we're here to help. Today, we break down one big change in the tax code that may affect your business: the Qualified Business Income Deduction. This change is in a series of others within the new tax code that helps you simplify your taxes as well as provide a significant reduction in how much you pay in Federal taxes.
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Here's the Low-down
With the recent government shutdown, many of these clarifications were long-awaited. Some of these businesses affected include "Specified Service Trade or Business" occupations (i.e. veterinarians, lawyers, accountants, and consultants, among others), whose deduction can be limited based upon their income, versus rental real estate owners with a significant number of hours spent managing their rentals can qualify for the deduction. Later, another clarification was announced regarding mutual fund holders.
The main idea of this deduction was aimed toward small business owners who operate a wide range of businesses. The deduction depend on factors such as type of business, marital status, other income and type of company (Sole Proprietorship, Partnership or S Corp) your company is registered as. It is meant to help keep record keeping simpler especially for companies with little income or few employees.
The maximum deduction is 20% of the net profits of your business income. The rationale was that since the C-Corporation tax rates were cut to a flat 21% for federal taxes something needed to be done for pass-through entities. Since these entities don't pay tax at the entity level, but rather at the shareholder/member/owner level the decision to reduce how much of the income of the business was taxed was made as one of the many compromises in the tax law that took effect in January 2018. For an S-Corporation earning $100,000 with an owner in the 22% tax bracket this new deduction would save the owner $4,400 in taxes per year. That is money that the owner can reinvest into the business, pay out as bonuses to employees or pay off debt.
As with many tax laws, the new qualified business income deduction tax codes are confusing and depend on many factors as to whether your small business qualifies. Talk to your accountant to see if/what you qualify for!
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