The 2017 Tax Cuts and Jobs Act (TCJA) allows certain types of pass-through businesses to deduct up to 20% of their qualified business income from their taxable income.
For example: the deduction allows for individual shareholders of an S Corp to take the deduction, but the S Corp itself may not.
Now, a new proposal wants to phase out the Section 199A qualified business income deduction for taxpayers with incomes of more than $400,000.
How the new proposal hopes to give tax breaks to smaller businesses
Known as the “pass-through deduction,” many corporations have used the 2017 deduction and have found tax break opportunities using complex tax strategies.
A pass-through business can be structured as possibly a limited liability company or a sole proprietorship, which passes income tax liabilities onto their individual owners instead of paying corporate income taxes.
Pass-through businesses account for 58% of all businesses with more than $50 million in receipts, and those filers received 61% of the 2017 benefit, according to a statement by Senate Finance Committee Chair Ron Wyden, D-Ore.
Small business owners have often been shut out of using the provision, due to the threshold.
There were also other caveats: Businesses including lawyers, accountants, dentists, and other professional services firms may take the deduction — but only up to the prevailing income threshold, which currently stands at $164,900, or $329,800 for joint filers.
Under the revised tax break, complicated categories and calculations used to determine which partnerships, limited liability companies, and other pass-through businesses qualify would be ditched. That then opens the deduction potentially to more businesses.
Sorting through the recent legislation and the new economic bill to come can be time-consuming and frustrating for business owners. It’s easier to delegate those tasks to a firm in the business of knowing how to navigate it all.
If you’re interested in a custom tax strategy for your business, contact the experts at Morgan & Associates today.