Business owners may have questions about which flow-through entity might be right for them after the Tax Cuts and Jobs Act.
Internal revenue Code (IRC) Section 199A provides a deduction for individuals and trusts on combined qualified business income (QBI). This provision is effective December 31, 2017, through December 31, 2025, and it applies to sole proprietorships, disregarded entities, partnerships (LLCs taxed as partnerships), and S Corporations.
QBI is ordinary income less ordinary deductions (with exceptions), and does not apply to wages, long-term and short-term capitals gains/losses, dividend income, interest income, or guaranteed payments.
The deduction is 20% of QBI, unless household income exceeds the $315,000 to $415,000 phase out range for married filing jointly (different phaseout limits apply to other tax filers). If QBI does exceed phase out, the deduction is limited to the greater of 50% of W-2 wages or 25% of W-2 wages plus 2.5% of property’s unadjusted basis.
However, if you are a qualified services business, owners cannot take any deduction after “phase out.” Disfavored businesses include services in the fields of health, law, accounting, performing arts, consulting, athletics, financial and brokerage services, in addition to others.
In addition, when considering whether to be a partnership or an S corporation, business owners should consider the unemployment tax liabilities they will face if they are a partnership versus the amount they will need to pay themselves as a “reasonable salary” if they are an S corporation.
If you have questions about which business entity might be right for you, you should reach out to a tax lawyer who can assist you with your questions and concerns.
Mendes Weed, LLP is here to help you if you have any questions. (925) 390-3222.
The tips and materials provided on this page are for informational purposes only, offered as public service. No information on this website should be considered legal advice or used as a substitute for legal advice. For legal advice, you should contact an attorney directly.
Mendes Weed, LLP is located in Walnut Creek and serves clients around the Bay Area. For your convenience, we also have offices in OAKLAND and Sacramento by appointment only.
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