New 20% Tax Deductions for Qualified Business Income ?

Who can claim Special Rate for Pass-Through Income

qualified business incomeThe Tax Cuts & Jobs Act has brought a new provision in the Internal Revenue Code to provide  20% tax deduction for all self-employed or freelancers or estate or trust from a partnership, S corporation or sole proprietorship or s corporation or who have qualified business income. This is in addition to 25 self-employment tax deductions already available to freelancers.

Unique Propositions

  1. The new tax incentive in the form of 20% deduction on qualified business income
  2. This new deduction is available even if an Individual has a salary or wage income.So, if you carry a side business, you can claim
  3. The new deduction of up to 20 percent is regardless of the individual’s tax bracket.

What is Qualified Business Income?

Qualified business income is the net amount of domestic qualified items of income, gain, deduction and loss with respect to the taxpayer’s qualified trades and businesses, which generally means any trades or businesses .

But the qualified business income cannot include income from certain class of business which are collectively defined as “specified service businesses.”

What are Specified Service Businesses ?

“Specified service businesses” are professions in the fields of

  • Health,
  • law, consulting,
  • athletics,
  • financial services,
  • brokerage services, or
  • any trade or business where the principal asset of such trade or business is
    • the reputation or skill of one or more of its employees or owners, or
    • which involves the performance of services that consist of investing and investment in management trading, or dealing in securities, partnership interests, or commodities (excluding engineering and architecture).

Limitation & Phaseout

Individuals who derive business income from specified service businesses, can treat such income as Qualified Business Income (BI ) if their taxable income is less than $315,000 (for married taxpayers filing a joint return) or $157,500 (for individuals). However, the benefit of the deduction for income from specified service businesses is phased out over a $100,000 range (for married individuals filing jointly; $50,000 for other individuals).

The deduction for an individual’s QBI is limited to the greater of following

(a) 50 percent of the individual’s “W-2 wages” paid with respect to the qualified trade or business, or

(b) the sum of 25 percent of the W-2 wages plus 2.5 percent of the unadjusted basis of all “qualified property” immediately after its acquisition.

Such wages include wages subject to wage withholding, elective deferrals, and deferred compensation paid by the taxpayer during the calendar year. The W-2 wage limit does not apply for taxpayers with taxable income not exceeding $315,000 (for married taxpayers filing a joint return) or $175,500 (for other individuals) with the same phase out as for income from specified service businesses.

What is Qualified Property?

Qualified property is a property on which one can claim depreciation and is used in the production of Qualified Business Income.

What is not included in Qualified Business Income?

QBI does not include certain investment-related income, gains, deductions, or losses. If a taxpayer has negative QBI for a particular year, the amount of such loss can be used to offset QBI in the following taxable year.

The Bill excludes from QBI

  • (1) any amount paid by an S corporation that is treated as reasonable compensation of the taxpayer and
  • (2) any amount that is a guaranteed payment for services actually rendered to or on behalf of a partnership or

 

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