The Tax Cuts and Jobs Act (TCJA) led to major tax reform. One specific section of the Act has produced some confusion for small business owners: the qualified business income deduction. This deduction has gone into effect for 2018 tax returns. As such, it is important to have a basic understanding of how the deduction could impact your taxes related to your business income.
What is the qualified business income deduction? The qualified business income deduction was included within the TCJA to provide a tax break for flow through business owners, many of whom own small businesses.
Who can get this deduction? According to the TCJA, business owners with taxable income at or below $157,500 for individual filers or $315,000 for those who file a married joint return qualify for the deduction. Those with income over this threshold may still be eligible for a partial deduction.
There are exceptions. Most notable, and confusing, involves an exception for certain service providers. Despite recent guidance that helps to clarify some of the law’s vague language, the definition of a “service provider” has not yet been made fully clear. The law states physicians, lawyers and consultants cannot take the deduction, but not every business fits neatly into these definitions. Businesses may operate accross several fields and find some income might be subject to the deduction, while other income may not qualify. As such, many tax professionals are stating this tax filing season will be the tax equivalent of the “Wild West.”
How can my business optimize to reduce taxes? Business owners can sometimes structure their business and entities to take better advantage of the deductions and savings newly available under the tax code. An attorney experienced in these matters can provide two key benefits towards reaching this goal. First, legal counsel can review the current structure and discuss existing tax obligations. Second, an attorney can discuss the potential restructuring aimed at improved tax treatment.