Section 199A (Qualified Business Income Deduction)
One of our favorite additions!
When calculating the “Pass Through Deduction” if your taxable income (line 43 on your 1040) is less than $315,000 married filing joint or $157,500 for other filers you automatically get the 20% deduction of Qualified Business Income (QBI).Once your taxable income exceeds these thresholds the 20% deduction is reduced until it is completely phased out at $415,000 married filing joint and $207,500 for other filers.This doesn’t mean you don’t get any deduction, just another limitation applies, the W-2 limitation.Once over the taxable income limits your deduction becomes the lesser of 20% of QBI or 50% of your allocable share of wages paid.If you are over the threshold amount and do not pay any wages, then you are out of luck for the deduction. Keep in mind calculating the 20% deduction and/or the W-2 limitation is on a per entity basis.
Are you eligible?
There are some entities also known as specified service businesses (SSB) that are indefinitely excluded from taking this 20% deduction.
The IRS defines Section 1099A as “Any trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, 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 1 or more of its employees.”
In plain writing, an SSB is basically someone who you go to or rely on advice for based on his or her reputation. Although, an SSB specifically does not include Architects and Engineers. We expect there to be more guidance regarding this legislation as we enter 2019.
Interest Expense Limitation:
Not so much a benefit but thought we’d let you know
Starting in 2018 a company with average gross receipts of over $25 million for the three prior taxable years can only deduct interest expense of up to 30% of Earnings Before Interest Tax Depreciation & Amortization (EBITDA) through 2021.Starting January 1, 2022, the 30% limitation will be based on Earnings Before Interest & Tax (EBIT).Any amount of interest beyond it will no longer be deductible, but would be a carryforward.This limitation appears to include an aggregation of gross receipts among taxpayers under common control.Entities below the $25 million threshold may still be subject to this limitation based on other entity ownership of its owners.For some entities this limitation does not apply, for example, entities that utilize floor-plan financing.Entities subject to this limitation can decide to elect out of the limitation, but in return will have to use the Alternate Depreciation System (ADS) which is not nearly as advantageous.This leads to affect highly leveraged entities as their interest expense would be significantly reduced during a time when interest expense is expected to rise.
C-Corporations starting after December 31, 2017 will be given a flat tax rate of 21%.The old tax law used a bracket system ranging from 15% to as high as 35%.C-Corporations currently being taxed in brackets under 21% may want to consider switching to a subchapter S-Corporation depending on your individual rate along with the benefits of the pass-through entity deduction.
Just some reinforcement 🙂
2018 Capital Gains Tax Rates:
Capital gains are taxed at a much more favorable rate than ordinary income.Under the new tax law there is no change to the capital gains rates.Interest and short-term capital gains are taxed as ordinary income while long-term capital gains are taxed at one of three rates.
Long-Term Capital Gains Rate
Up to $38,600
Up to $77,200
Up to $51,700
$38,600 – $425,800
$77,200 – $479,000
$51,700 – $452,400
The Net Investment Income Tax (NIIT)
The Net Investment Income Tax is also unchanged.This is a 3.8% additional tax for married filing joint returns with investment income and modified adjusted gross income over $250,000, $125,000 for married filing separately, and $200,00 for all other filers.
We have had the new tax law covered since day one. If you have any questions about the changes under the new law, please don’t hesitate to contact us!
Keith Boyer, Certified Public Accountant