New Tax Law Benefits for Certain Closely Held Businesses
The “Tax Cuts and Jobs Act” was signed into law on December 22, 2017. Section 199A of the Act has a significant impact on certain “pass through” entities including Subchapter S corporations, sole proprietorships and certain limited liability companies. At a high level, individual (non-corporate) taxpayers who generate “qualified business income” (QBI) from an eligible business will be entitled to take a deduction of 20% of their QBI subject to certain limitations.
QBI is ordinary income less ordinary deductions that a taxpayer earns from an eligible entity. It does not include W-2 income or guaranteed payments (as may be received from a partnership or a limited liability company with partnership tax treatment).
If an eligible taxpayer has QBI in excess of $157,500/$315,000 (married filing jointly), the deduction is capped based on a formula and cannot exceed (a) 20% of the taxpayer’s QBI or (b) the greater of (i) 50% of the taxpayer’s allocable share of W-2 wages with respect to the business or (ii) 25% of the taxpayer’s allocable share of W-2 wages with respect to the business plus 2.5% of the taxpayer’s allocable share of the unadjusted basis of all qualified property immediately after acquisition.
It is important to note that certain service businesses are disfavored under the Act including law, accounting, investment management, medicine and any business that has as its principal asset the reputation or skill of its owners or employees. The QBI deduction for these business is limited if an otherwise eligible taxpayer has total income in excess of $157,500/$317,000 (married filing jointly), and is phased out altogether if total income exceeds $207,500/$415,000 (married filing jointly).
It is important to note that tax and legal professionals, as well as the Treasury Department, are just beginning to analyze the Act and its implementation. This article is not intended to provide tax advice and we urge you to consult with your tax advisors regarding the application of the Act to your particular situation.
If you have any questions related to this topic and how it may affect you and your business, our Corporate Department may be able to help. To reach one of our Corporate attorneys please call our office at 617-951-3100.