written by Ray Moncrieffe
The IRS issued proposed regulations regarding the qualified trade or business income deduction which was enacted by the Tax Cuts and Jobs Act signed into law on December 22, 2017. The proposed regulations provide guidance on the definition of “trade or business” and the new terminology “specified service trade or business” (SSTB).
This deduction, which is in effect for the first time beginning in 2018, may allow owners of sole proprietorships, partnerships, trusts and S corporations to deduct up to 20 percent of their “qualified business income”.
Generally, all business owners with taxable income below $315,000 (for joint returns; $157,500 for all other taxpayers), are allowed the deduction. Once taxable income reaches or exceeds $415,000 (jointly; $207,500 for all other filers), the business owner receives no deductions for business income if your business is deemed to be a SSTB.
If your business is not an SSBT and your taxable income exceeds $415,000 (for joint filers; $207,500 for all other filers), then the W-2 wages and the qualified property provisions, of the entity, must be applied when calculating the deduction.
Under the law, an SSBT are businesses in the following fields:
- actuarial science
- the performing arts
- financial services (note: banks are not deemed to be an SSBT)
- brokerage services
The guidance also clarifies the meaning of “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.” Under the guidance, the meaning of “reputation or skill” is limited to fact patterns where the taxpayer is:
- Receiving income from the endorsement of products or services.
- Licensing or receiving income for the use of the individual’s image, likeness, name, signature, voice, trademark or any other symbols associated with that individual’s identity.
- Receiving appearance fees.
How does this impact me?
If you find your business falls into one of the general SSBT categories, it will be necessary to take a second look at the activities you are performing in your business. While the services of a doctor’s office, dentist’s office or pharmacy may not qualify in the health field, a health club or spa – or the research, testing and sale of pharmaceuticals and medical devices—may qualify for the 20 percent deduction.
Now that the IRS has provided more clarity to this law, it’s time to establish a strong tax preparation strategy. At Whitlock, we pride ourselves on strategic business planning, wealth management and comprehensive tax services to help you succeed. Through our Outsourced Accounting and Outsourced CFO services, our team is well-versed when it comes to handling every aspect of a business’ financial picture. We’ll learn from your past, immerse ourselves in your present, and provide actionable insights and critical decision-making data to strategically plan for your future.
If you have any questions about these changes or want to know how this interpretation of the 20 percent deduction could impact you, please contact Ray Moncrieffe or another member of The Whitlock team. Click here for contact info.
Because we are committed to keeping you in-the-know, we have started a four-part blog series examining the impact of Tax Cuts and Jobs Act on businesses. The first blog in the four-part series explored company vehicles, meals and entertainment. Check back next month when we delve into how taxes on charitable giving are impacting businesses.
Ray Moncrieffe has more than 25 years of national and regional experience in the accounting industry. Throughout his career as a tax manager, he is skilled in tax preparation, consolidation, account reconciliation, corporate tax and financial reporting.