Are You a Favored Business? The New 20% Pass-Through Deduction Can Make a Big Difference in Your Tax Bill

One of the winners from the Tax Cuts and Jobs Act of 2017 are pass-through businesses… but only at certain income levels, and then for only certain types of businesses.

What’s the Deal?

New tax code Section 199A creates a totally uncomplicated 20% tax deduction on qualified business income if you operate a sole proprietorship, partnership, an LLC or an S corporation and you:

  • Are married filing jointly with less than $315,000 in taxable income, or
  • Are a single filer with less than $157,500 of taxable income, and/or

An Example

You operate a proprietorship, file as a single taxpayer with $135,000 of taxable income, and have qualified business income of $120,000.

Your new 20% tax deduction is $24,000 ($120,000 x 20 percent).

What if your Business Income Exceeds those Limits?

This is where the type of business that you operate comes into play.

An “in-favor business” benefits at all times, including being above, below, or in the expanded wage and property phase-in range.

On the other hand, if your business is a specified service trade or business (doctors, lawyers, accountants, actors, athletes, traders, etc.), it is in the “out-of-favor” group. You benefit only when you are in or below the phase-out range.

“Any trade or business involving the performance of services in the fields of health, law, engineering, architecture, 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 one or more of its employees [or owners].”

Internal Revenue Service § 1202(e)(3)(A)

This is interesting to note: only engineers and architects are excluded from the long list of “non-favored” service businesses who cannot take advantage of the deduction if their income exceeds  $315,000 for married filing jointly and $157,500 for single filers. 

Some Tax Planning May Be in Order

If your taxable income is going to be above the threshold amounts that trigger the phase-in or phase-out issues, you should spend time on your tax planning with a qualified Enrolled Agent.

Similarly, if you are thinking of setting up a new business, or changing the structure of an existing business, it would be wise to consult with an Enrolled Agent prior to doing so.

For example, C Corporations have been given a significant (and permanent) tax cut.

The pass-through deduction? That expires with the 2025 tax year.

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Jeffrey Schneider, EA, CTRS, NTPI Fellow has the knowledge and expertise to help you reach a favorable outcome with the IRS. He is the head honcho at SFS Tax & Accounting Services as well as the Enrolled Agent and Certified Tax Resolution Specialist for SFS Tax Problem Solutions.
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Now What? I Got A Tax Notice From The IRS. Help! Defining and deconstructing the scary and confusing letters that land in your mailbox. Jeff defines and deconstructs the scary and confusing letters in a fashion that mixes attention to detail with humor and an intricate clarification of what is what in the world of the IRS.

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