The much-talked-about tax cut legislation passed in 2017 reduced corporate income tax rates from a graduated rate up to a maximum of 35% to a flat 21% for all corporations. The 199A deduction is meant to give owners of non-C Corporation businesses a tax break similar to that given to corporations. Since many small business owners choose S corporations, LLCs and sole proprietorships as business entities, the 199A deduction should benefit middles class taxpayers. As many tax experts have pointed out, though, claiming the deduction may be a bit difficult, as the rules are not easy to understand. Official information about the deduction can be found here.
Determining eligibility for the new deduction involves three steps:
Step 1. Is the business a Qualified Trade or Business (QTB) or a Specified Service Trade or Business (SSTB)? This is important because the deduction is not available for income derived from an SSTB if the taxpayer's income is above a threshold amount ($157,500 for individuals, and $315,000 for married couples). For taxpayers above those income thresholds, the deduction is not available for businesses in the fields of law, accounting, consulting, the performing arts, or any business whose principle asset is the reputation or skill of one of its owners or employees. In other words, the deduction is not available to nationally known recording artists, but may be taken by lesser known musicians. If your business is not a SSTB and you are not a W-2 employee, it is likely that your business will meet the QTB definition.
Step 2. Determine the correct amount of qualified business income. Income from capital gains, dividends, and some other specified sources does not count as qualified business income. Income from each business must be calculated separately, so if you own two businesses, the separate incomes for each must be separately calculated. If a business has multiple owners, the amount of each owner's share in the business income must be calculated and reported to that owner. If an owner receives income both as an owner and as an employee, only the income received as an owner counts toward the deduction.
Step 3. Determine the amount of the deduction. The business owner has the option of aggregating the income from multiple business for purposes of taking the deduction. This decision, once made, cannot be changed, so it is important to consult with a tax expert before making this decision. After the proper amount of business income is calculated, 20% of the total may be deducted from the taxpayer's taxable income.
The 199A deduction was available for the first time for the 2018 tax year. If you applied for an extension and have not filed a tax return for 2018, you are eligible to take the deduction. If not, the deduction will be available for 2019 income, and will continue through 2025, at which time it is scheduled to end. For new business owners, the availability of the deduction may play a part in the decision about what type of business entity should be used. For more information, talk to a business law expert at Erie Law. Call us at (814) 315-9255 or visit our website at https://www.eriebusinesslaw.com/.