Entrepreneurs Get New 20% Tax Deduction

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There’s a new tax deduction available for sole proprietors, S Corporation Shareholders, LLC Members, Real Estate Investors and Partners (Pass Through Businesses). It’s called the Qualified Business Income Tax Deduction.

If you qualify, you can get a deduction equal to 20% of the taxable profit from your business for calendar years beginning in 2018.

Step #1 Calculate Qualified Business Income

The first step in figuring out the deduction involves calculating Qualified Business Income (QBI). This is essentially the taxable profit from each pass through business you own minus:

  • Capital Gain Income
  • Dividend Income
  • Interest Income
  • Guaranteed Payments (Partnerships only)

Once you figure out the QBI for each Pass Through Business you own, you combine those amounts into one Combined QBI amount.

Step #2 Calculate Qualified Business Income Deduction

This is where it gets complicated.

Your QBI Deduction will be the lower of three amounts:

  1. 20% X Taxable Income of Taxpayer or
  2. 20% of the Combined QBI or
  3. The Limitation Calculations

The Limitation Calculations are the greater of:

  1. Wage Limitation – 50% X W-2 Wages of all Pass Through Businesses or
  2. Capital Limitation – 25% X Wages of all Pass Through Businesses Plus 2.5% of the Tax Cost Basis of Qualified Business Property. Qualified Business Property generally means Real Estate you purchased. This Capital Limitation applies when you own real estate as part of your Pass Through Business.

Step #3 Calculate Professional Service Business Limitation

There is one last additional calculation you must perform.

If any of your businesses are considered Professional Service Businesses, you must calculate the Professional Service Business Limitation and this then becomes your deduction. Essentially, your Qualified Business Income Deduction, with respect to any businesses that are considered Professional Service Businesses, is phased out (goes away) if:

  • Your taxable income on your tax return is between $315,000 to $415,000, if married or
  • Your taxable income on your tax return is between $157,500 to $207,500, if single.

Professional Service Businesses include any service business in which you, the taxpayer, are an owner. This includes, doctors, accountants, lawyers, financial advisors, etc.

Contact you CPA or email me if you have any questions: tom@richhabits.net

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Thomas C. Corley About Thomas C. Corley

Tom Corley is a bestselling author, speaker, and media contributor for Business Insider, CNBC and a few other national media outlets.

His Rich Habits research has been read, viewed or heard by over 50 million people in 25 countries around the world.

Besides being an author, Tom is also a CPA, CFP, holds a master’s degree in taxation and is President of Cerefice and Company, a CPA firm in New Jersey.
 
Phone Number: 732-382-3800 Ext. 103.
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