What areas need to consider under the new tax law?
Including structuring, maximizing the pass-through deduction and assets purchases
What are the pass-through entities?
S corporations, partnerships, LLCs, and sole proprietorships
What is the difference between pass-through entities and C corporations?
Business owners taxed at the individual tax rate at the 37% maximum under new tax law. In addition, owners may eligible the 20% of the qualified business income (QBI) deduction, but subject to exceptions and limitations. On the other hand, C corporation taxes at a flat-rate 21%. It subjects to double taxation when profits are paid out in dividends.
In addition, QBI deduction is available to passive and activity investors, so they are eligible to claim the deduction.
What is QBI?
QBI is defined as any trade or business from pass-through entities excluded specified service businesses. Specified service businesses are most professional practices (such as accountants, lawyers, consultants, financial services, brokerage services) engineering and architecture excluded. Under an exception, the service business limitation doesn’t apply until an individual owner’s taxable income exceeds $157,500 ($315,000 for joint filers). Above those income levels, the service business limitation is phased in over a $50,000 phase-in range ($100,000 range for joint filers).
Beginning in 2018, individual taxpayers and a trust or estate are eligible 20% deduction of the individual’s domestic qualified business income from pass-through entities. However, the deductions are subject to the limitation in the following:
W-2 wage limitation
For pass-through entities other than sole proprietorships, the QBI deduction generally can’t exceed the greater of the non-corporate owner’s share of:
- 50% of the amount of W-2 wages paid to employees by the qualified business during the tax year, or
- The sum of 25% of W-2 wages plus 2.5% of the cost of qualified property.
Qualified property is the depreciable tangible property (including real estate) owned by a qualified business as of year-end and used by the business at any point during the tax year for the production of qualified business income.
Under an exception, the W-2 wage limitation doesn’t apply until an individual owner’s taxable income exceeds $157,500 ($315,000 for joint filers). Above those income levels, the W-2 wage limitation is phased in over a $50,000 range ($100,000 range for joint filers).
Cash Method of Accounting
The cash method will be available to more taxpayers under the new tax law. To be eligible applying cash method, the average gross receipts for the three prior tax years do not exceed $25 million. Moreover, cash method is available regardless of whether taxpayers maintain inventories and they are also exempt from the requirement to capitalize indirect costs to inventories under uniform capitalization rules.
Estate and Gift Planning
The new tax law did not eliminate the federal estate, gift, and generation-skipping transfer taxes. Instead, the new Act doubles the exemptions to approximately $11,210,000 per person as of January 1, 2018. The tax rate on transfers in excess of the exemption will remain 40%.
These are just highlights of the changes and impact of the new tax law. There is much more to discuss than can be covered in this letter. Please do not hesitate to contact our office for this and other changes that will impact your business.