Listed below are the top five areas business owners should consider along with some potential questions needing answers from their tax professionals this tax season:

20% Pass-Through Deduction

Have you heard about “QBI” or a “20% Deduction?” Are you wondering what they mean and how they apply?  

New for 2018 are rules that allow for certain businesses that generate qualifying income to produce a 20% deduction that may be deductible on each individual partner’s or shareholder’s income tax return.  The decisions made by you or your tax professional at the business level will impact the possible deductions at the partner or shareholder level.

• Does the 20% deduction on income generated by partnerships, S-corporations, and sole proprietorships apply to your business and who actually takes the potential deduction?  
• Does your business generate qualifying income and potentially have qualified W-2 wages and property?  
• How do S-corporation shareholder wages and partner guaranteed payments affect the overall 20% business deduction?  
• What do you need to know if you operate your business as a sole proprietorship and have no qualifying W-2 wages to report?  

Entity Selection

Are you starting a new business or re-thinking your current one?

Choosing the right entity type for your long-term business plans is one of the most important considerations given the new tax laws and how they affect businesses both large and small.

• Which tax entity type makes the most sense for your business moving forward?  
• Are you a single-member LLC looking to make an S-corporation election or an S-corporation looking to convert to a C-corporation?  
• Or, are you a business start-up trying to decide on how to organize for tax purposes in the first year of your business?  

Business Meals and Entertainment

The new Trump Tax Bill has changed the way businesses will view the deductibility of meals and entertainment expenses incurred during 2018 and moving forward.  While business meal expenses are generally still deductible, entertainment expenses are not and must be tracked separately for tax purposes.

• Can you still deduct business related meals and entertainment expenses during 2018?
• What determines a deductible business meal versus non-deductible entertainment expenses?

Business Asset Expensing

Being able to understand the various tax write-off methods for assets your business purchases during 2018 and beyond is a key element for successful tax planning.  The benefits may vary widely.

• What types of tax asset expensing options are available for your business during 2018 and beyond?  
• Can you really write-off 100% of the cost of purchasing new or used assets placed into service during 2018?  
• Do these expedited expensing options apply to improvements made to non-residential buildings?  

Like-Kind Exchanges

The rules for like-kind exchanges have changed under the new tax law starting in 2018 and now apply only to real estate.  However, have you heard about “Opportunity Zone” reinvestment opportunities and how they may benefit your tax situation?

• Do like-kind exchanges and/or trade-ins still apply for both real estate and tangible property for tax purposes?  
• Does a like-kind exchange provide the most benefit for your business? 

If you have questions about the discussion above and would like additional guidance, please contact us.

Daniel L. Crowson, CPA
dcrowson@burkettcpas.com

Adam R. Jackson, CPA
ajackson@burkettcpas.com

Burkett Burkett & Burkett Certified Public Accountants, P.A.
3101 Sunset Blvd
West Columbia, SC 29169
(803) 794-3712

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Full vs. partial phase-in

When the wage limit is fully phased in, at $415,000 for joint filers and $207,500 for other filers, the QBI deduction generally can’t exceed the greater of the owner’s share of:

• 50% of the amount of W-2 wages paid to employees during the tax year, or
• The sum of 25% of W-2 wages plus 2.5% of the cost of qualified business property (QBP).

When the wage limit applies but isn’t yet fully phased in, the amount of the limit is reduced and the final deduction is calculated as follows:

1. The difference between taxable income and the applicable threshold is divided by $100,000 for joint filers or $50,000 for other filers.
2. The resulting percentage is multiplied by the difference between the gross deduction and the fully wage-limited deduction.
3. The result is subtracted from the gross deduction to determine the final deduction.

Some examples

Let’s say Chris and Leslie have taxable income of $600,000. This includes $300,000 of QBI from Chris’s pass-through business, which pays $100,000 in wages and has $200,000 of QBP. The gross deduction would be $60,000 (20% of $300,000), but the wage limit applies in full because the married couple’s taxable income exceeds the $415,000 top of the phase-in range for joint filers. Computing the deduction is fairly straightforward in this situation.

The first option for the wage limit calculation is $50,000 (50% of $100,000). The second option is $30,000 (25% of $100,000 + 2.5% of $200,000). So the wage limit — and the deduction — is $50,000.

What if Chris and Leslie’s taxable income falls within the phase-in range? The calculation is a bit more complicated. Let’s say their taxable income is $400,000. The full wage limit is still $50,000, but only 85% of the full limit applies:

($400,000 taxable income – $315,000 threshold)/$100,000 = 85%

To calculate the amount of their deduction, the couple must first calculate 85% of the difference between the gross deduction of $60,000 and the fully wage-limited deduction of $50,000:

($60,000 – $50,000) × 85% = $8,500

That amount is subtracted from the $60,000 gross deduction for a final deduction of $51,500.

That’s not all

Be aware that another restriction may apply: For income from “specified service businesses,” the QBI deduction is reduced if an owner’s taxable income falls within the applicable income range and eliminated if income exceeds it. The QBI can be complicated and deserves a personalized review for your individual tax situation.  Please contact us to learn whether your business is a specified service business or if you have other questions about the QBI deduction.  Carpe Diem 2018!

© 2018

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