Many small businesses are passthrough entities, including S corporations, partnerships, sole proprietorships, LLCs, and LLPs. The label indicates that all business earnings are passed through to the owners’ personal income tax returns. Thus, they avoid the corporate income tax.

The Tax Cuts and Jobs Act of 2017 contains a new tax benefit for pass-throughs. This provision is complex, but it is relatively straightforward for taxpayers with taxable income below $157,500 in 2018, or $315,000 on a joint return. Such business owners may qualify for a tax deduction that equals 20% of their qualified business income.

For example, suppose a taxpayer runs her business as an LLC and has qualified business income (the net of her company’s domestic business taxable income, gain, deduction, and loss) of $140,000 in 2018. Further suppose that this taxpayer files a joint return with her husband that shows $235,000 in taxable income for 2018. Then, this taxpayer can deduct $28,000 (20% of $140,000) from her taxable income. Note that this deduction doesn’t reduce the taxpayers adjusted gross income, which can impact many areas of a tax return.

For taxpayers over $157,500 or $315,000 in taxable income, other factors come into play, which can reduce the qualified business income deduction. Moreover, some service businesses, such as medical practices and law firms, cannot claim income as qualified business income if their income is over certain limits. Our office can illustrate the value of the deduction for your pass-through business income.

This article carries no official authority, and its contents should not be acted upon without professional advice. For more information about this topic, please contact our office.