The new 2018 Section 199A tax deduction that you can claim on your IRS Form 1040 is a big deal. There are many rules (all new, of course), but your odds as a business owner of benefiting from this new deduction are excellent.
Rejoice if you operate your business as a sole proprietorship, partnership, or S corporation, because your 2018 income from these businesses can qualify for some or all of the new 20 percent deduction.
You also can qualify for the new 20 percent 2018 tax deduction on the income you receive from your real estate investments, publicly traded partnerships, real estate investment trusts (REITs), and qualified cooperatives.
When can you as a business owner qualify for this new 20 percent tax deduction with almost no complications?
To qualify for the 20 percent with almost no complications, you need two things: First, you need qualified business income from one of the sources above to which you can apply the 20 percent. Second, to avoid complications, you need “defined taxable income” of
Example. You are single and operate your business as a proprietorship. It produces $150,000 of qualified business income. Your other income and deductions result in defined taxable income of $153,000. You qualify for a deduction of $30,000 ($150,000 x 20 percent).
If you operate your business as a partnership or S corporation and you have the qualified business income and defined taxable income numbers above, you qualify for the same $30,000 deduction. The same is true if your income comes from a rental property, real estate investment trust, or limited partnership.
Some unfriendly rules apply to what Section 199A calls a specified service trade or business, such as operating as a law or accounting firm. But if the doctor, lawyer, actor, or accountant has defined taxable income less than the thresholds above, he or she qualifies for the full 20 percent deduction on his or her qualified business income.
In other words, if you were a lawyer with the same facts as in the example above, you would qualify for the $30,000 deduction.
Once you are above the thresholds and phaseouts ($50,000 single, $100,000 married filing jointly), you can qualify for the Section 199A deduction only when
As you can see, there’s much to this new 2018 tax deduction. You may want to spend some time with me planning for this deduction. If so, please call me on my direct line at (512) 865-4075 and let’s set a time to meet.
BR TAX GROUP
The recent tax reform added new tax code Section 67(g), which states, “No miscellaneous itemized deduction shall be allowed for any taxable year beginning after December 31, 2017, and before January 1, 2026.”
John is a W-2 mortgage banker paid on a commission basis, and during 2018, he will incur $27,000 of employee business expenses. His 2018 tax deduction for his employee business expenses will be zero. How do you think John will feel?
Before the recent tax reform, employees were already getting the short end of the stick when it came to business expenses. Why? The alternative minimum tax (AMT) did not allow tax deductions for employee business expenses, so those employees who had to pay the AMT were granted no business deduction tax benefits.
Of course, not all employees suffered the AMT. Those who did not suffered simply a 2 percent of adjusted gross income floor on deductions that fell into the miscellaneous itemized deduction category.
All of this was bad, but it was NOTHING compared to ZERO business deductions—period. Getting a zero deduction for your legitimate business deductions is absolutely unfair. Is it possible that you can get even?
Let me tell you the story of Dan Butts.
Dan Butts, an Allstate insurance agent, paid almost $10,000 more in federal income taxes than his State Farm counterparts did because Allstate treated him as an employee. State Farm treated its agents as independent contractors.
In other words, with exactly the same income and the same tax deductions as a State Farm agent, Butts, the employee, paid $10,000 more in federal income taxes than a State Farm independent contractor agent did, for only ONE reason—the AMT does not allow a penny in deductions for business expenses.
Butts, with the heart of a lion, decided that he was not going to take this AMT unfairness lying down. He took on the system. He amended his tax return and put his W-2 employee commission income on Schedule C. He then subtracted his business expenses from this Schedule C income just as the State Farm agents did, and presto, he saved almost $10,000 in taxes.
The IRS immediately noticed that Butts had put his income and expenses on the wrong tax form. After discussions, the IRS sent Butts a notice of deficiency stating that it wanted the almost $10,000 in taxes.
Butts said, “Forget it!” He took the IRS to court and won.
This was no ordinary case. Allstate had treated Butts as a W-2 employee from the time he started to work for them almost 20 years before. He was happy with this employee arrangement; happy, that is, until lawmakers enacted the Tax Reform Act of 1986 and applied the AMT to his employee business expenses, which hammered his business deductions right out of his tax return.
In this case, the court granted Butts independent contractor status even though Allstate Insurance
The court ruled for Butts because he had a “risk of loss” in his sales activities, and that made him just like other independent contractor agents.
It’s possible you can have facts that line up with those of Butts or another taxpayer who won status as an independent contractor despite being paid on a W-2.
If you think you could be one of these fortunate ones, let’s spend some time examining your facts to see if we might have a good case. My direct line at the office is (512) 865-4075
Tax reform changed the rules of the game when choosing your best tax structure.
In looking over the possibilities, we note that a properly structured spousal partnership could be your best choice.
Here are the tax benefits to you:
Here are the potential issues:
If you would like to discuss how your choice of business entity works in today’s tax environment, please don’t hesitate to call me on my direct line at (512) 865-4075.
Tax reform created a new 20 percent tax deduction for select pass-through entities. Will your business operation create the 20 percent tax deduction for you?
If not, and if that is due to too much income and a lack of (a) wages and/or (b) depreciable property, a switch to the S corporation as your choice of business entity may produce the tax savings you are looking for.
To qualify for the full 20 percent deduction on your qualified business income under new tax code Section 199A, you need defined taxable income of less than $157,500 (single) or $315,000 (married).
If your taxable income is greater than $207,500 (single) or $415,000 (married), you don’t qualify for the Section 199A deduction unless you have wages or property.
Example. Sam is single, not in the out-of-favor specified service trade or business group (doctors, lawyers, consultants, etc.), operates a sole proprietorship that generates $400,000 of proprietorship net income, and has taxable income of $370,000. In this condition, Sam’s 20 percent Section 199A tax deduction is zero.
Here’s how the S corporation helps Sam. The S corporation pays Sam a reasonable salary, let’s say that’s $100,000. With this salary, Sam pockets
Is this something you and I should talk about? If so, please call me on my direct line and we’ll set a time.
Here’s the updated strategy: deduct your client and business meals as if tax reform never took place.
Wow. Is this aggressive? Not if
How big is the “if” in the if? We have some insights that say business meals will be deductible for all of 2018. Of course, nothing is certain except the current uncertainty.
Let’s put it this way: if you do what you need to do to deduct the meals, then you are in a position to claim the business meals deduction when one of the above happens. So, make sure you have your 2018 business meals documented as follows:
If you want to discuss the business meals deduction with me, don’t hesitate to call BR Tax Group (512) 865-4075