The Tax Cuts and Jobs Act of 2017 completely overhauled the US tax system, creating significant new deductions for business owners and entrepreneurs. Along with a substantially reduced corporate tax rate, many businesses may also claim a 20% deduction on qualifying income, potentially reducing your liability by thousands of dollars. These changes are already in effect for 2018, so consult with an accountant to develop a strategy for maximizing your tax benefits.

Understanding the Qualified Business Income Deduction

Who Qualifies for the Deduction?

Under the new law, sole proprietors, partners in a registered partnership, members in LLCs taxed as partnerships, or S corporation shareholders may be eligible for the new deduction. However, businesses that rely on the expertise and skills of a single employee, such as stock brokers, performing artists, and investment analysts, are specifically excluded from claiming this deduction if their income exceeds $157,500 for individuals or $315,000 for married couples filing jointly.

What Is Qualified Income?

Only income directly related to your business activities qualifies for the deduction, and it doesn’t include any reasonable compensation or guaranteed payments made to owners or members. Earnings derived from investments or other sources are not eligible for the deduction.

How Do Wages Affect Your Deduction?

Businesses with over $157,500 in qualified business income (or $315,000 for married couples) may be subject to a wage limitation. These entities will be able to take the 20% deduction or a deduction equal to 50% of their total W-2 wages, whichever is less. For example, a florist with $300,000 in revenue and $80,000 in wages will be able to deduct only $40,000, rather than the full 20% deduction. A certified public accountant will determine which deduction you qualify for and minimize your liability as much as possible.

As a well-respected certified public accountant’s office with an extensive reputation for high-quality service, Donna J Troutman CPA PC provides comprehensive services to businesses throughout Lewisburg, PA. As confusing as the newly updated tax code may be, you can rely on their team to guide you through the system and to maximize your tax benefits. To schedule your initial appointment with an accountant, visit their website or call (570) 523-7337 today.