A centerpiece provision of the Tax Cuts and Jobs Act is the new Sec. 199A measure that affords owners of sole proprietorships, partnerships, S corporations and trusts a 20 percent deduction on their qualified business income (QBI) beginning in tax year 2018. In general, the deduction is available to qualifying business owners with taxable income below $315,000 for joint filers and below $157,500 for other filers, with potentially limited benefit above those levels. Small businesses qualifying for the 20 percent tax deduction could see their effective marginal tax rate reduced to 29.6 percent.
Another significant change under the Tax Cuts and Jobs Act is the reduction of tax rates for C corporations to a flat 21 percent. Also, remember that C corporations are taxed twice – once on the corporate income and then on the returns to investors. These new tax law changes present tax professionals and small business owners with some in-depth tax planning opportunities to determine the best entity type, optimize qualified business income, and potentially realize substantial tax savings.
Intuit® ProConnect™ has developed the QBI Entity Selection Calculator to provide in-depth computations of the qualified business income deduction according to IRS worksheets for tax planning purposes, and allow tax professionals to evaluate and optimize the best type of legal entity for small business owners to consider based on tax benefits.
- Incorporates two worksheets from Chapter 12 of IRS Publication 535
- Schedule A – Specified Service Trade or Business (SSTB) (phase-out computation)
- Worksheet 12A – Qualified Business Income Deduction Worksheet
- W-2 wages & unadjusted basis of qualified property limit
- Phased-in reduction
- 20% of taxable income limit
- Allows users to evaluate optimal entity type, including including Schedule C/E, partnership, S corporation and C corporation, based on amounts entered
- Includes designation for filing status
Additional Planning Opportunities
- Depending on the QBI and taxable income levels, it might make sense to purchase a capital asset or contribute to a retirement plan in the current year or hold off until next year to help maximize the QBI deduction.
- Since W-2 wages reduce qualified business income but increase the wage / UBIA limitation, there is a planning opportunity to optimize wages paid and thus maximize the QBI deduction.
- Because of the phase-outs and threshold amounts, married taxpayers may want to compare married filing jointly versus married filing separately to see which status yields the higher benefit.
For additional resources, visit IRS Deduction for Qualified Business Income FAQs.
Editor’s note: This article was originally published on Oct. 29, 2018, and was re-published with information about calculator updates on Jan. 18, 2019.