IRS Proposes Regulations for Small Business Tax Deduction

The Tax Cuts and Jobs Act that went into effect at the beginning of this year provides a major tax break for small businesses. As specified in the legislation, owners of pass-through business entities such as sole proprietorships, partnerships, S-corporations and limited liability companies are allowed to take a tax deduction equal to 20% of their taxable income or the qualified income of the business, whichever amount is lower. Since a pass-through entity does not file a separate business tax return, this tax deduction is claimed on the personal income tax return of the business owner.

While the original tax legislation placed income limits and certain other restrictions on the use of the Section 199A Deduction (described above), a number of questions regarding its use have been raised since that time. In response to these ambiguities, the IRS recently released a 184 page document proposing specific regulations designed to govern its use. Some of these regulations are highlighted below:

  1. The Section 199A Deduction went into effect on January 1, 2018 and will expire on December 31, 2025.  

  2. The deduction is available to all owners of pass-through entities whose taxable income is less than $315,000 for a joint return or $157,500 for an individual return.

  3. Above the income thresholds identified above, specified service trades or businesses such as attorneys, healthcare professionals and brokerage services are subject to certain phase-in provisions.

  4. The phase-in range described above extends to $415,000 for joint filers and $207,500 for single filers. Above this range, the owner of a specified service trade or business must pay income taxes based on their individual income tax rate.

  5. There is no Section 199A income cut-off for businesses that are not classified as a specified service trade or business. However, these businesses may be limited by the total amount of W-2 wages paid by the business.

  6. The amount of the Section 199A Deduction is equal to 20% of taxable income minus capital gains or 20% of qualified business income plus qualified investment trust dividends and publically traded partnership income, whichever is less.

  7. If a taxpayer owns more than one business, the qualified business income is the total of the qualified business incomes of the multiple businesses.

  8. A negative qualified business income can be carried forward to the next tax year.

Although the basic 20% Section 199A Deduction has been firmly in place since the Tax Cuts and Jobs Act took effect on January 1, 2018, the regulations governing its use are a work in progress. The 184 page document recently published by the IRS will be in review for 45 days from the time of its publication, at which time specific adjustments will be considered. Meanwhile, the tax professionals at LA Bookkeeping are keeping abreast of current status of this important piece of tax legislation and stand ready to help your small business use it to achieve the greatest tax advantage possible.

Los Angeles bookkeeping, conveniently located in Beverly Hills, California, employs Certified Public Accountants, licensed Enrolled Agents and certified bookkeepers who have the knowledge and experience necessary to provide each client they serve clients with the full range of tax, accounting and bookkeeping services. Don’t delay! Get your business tax plan on track today by contacting the professionals at LA Bookkeeping. Call us at 310-765-1596 or email us to schedule a free, no obligation consultation.