Signed into law in December 2017, the Tax Cuts and Jobs Act (TCJA) established a new provision that allows a 20% tax deduction for owners of pass-through entities. The provision, also known as Section 199A, extends to more than 17 million households currently receiving income from a pass-through business.
Types of businesses qualifying for the tax deduction include sole proprietorships, S corporations, partnerships, and LLCs. These companies are not subject to the corporate income tax. Instead, the owner of the business reports his or her share of the profits or losses and pays their tax rate at an individual level.
Specifically, the new provision will be applied to qualified business income (QBI), which is defined as net income earned over the course of the year. So far, it has reduced the tax rate for pass-through business owners to 29.7%.
Though the TCJA provided more of a tax reduction for corporate businesses (down to 21%), the provision has served to narrow the tax gap between corporations and pass-through companies.
Some limitations on the deduction exist for certain pass-through entities. For businesses (with the exception of sole proprietorships), the 20% deduction is limited to the W2 wage limitation. The deduction cannot exceed the greater of 50% of the owner’s share of the business OR 25% of the owner’s share of the business’s W2 wages plus 2.5% of the owner’s share of the business’ unadjusted basis of all qualified property.
Additionally, not every pass-through business can qualify for the tax deduction. Entities designated as “specialized service businesses or trades” are not eligible for the deduction.
Architects and engineers are specifically exempted from this “specialized service business” category and may still qualify for the tax deduction. If the owner of a pass-through business is an employee for another company, he or she will be disqualified from the deduction and may only qualify after quitting and becoming a self-employed contractor.
The deduction provision is projected to remain in effect until January 1, 2026.
Retirement income planning for your parents generation was much different than it is today.
According to the US Bureau of Labor Statistics, in 1990 35% of US workers were covered by a pension-by 2011 this had dropped to 18%.
Often people with a 401(k) plan, an IRA, and Social Security mistakenly believe they have a plan. This may be a good start, however this is not an actual plan. In the past, employer-sponsored pension plans provided some level of lifetime income. However, with pensions disappearing, most people will not know exactly how much income they can expect to receive from their employer-sponsored retirement plan until they actually retire.
Source: Wiatrowski, William. “The Last Private Industry Pension Plans: A Visual Essay.” Monthly Labor Review 65.1 (2012): n. page. Dec. 2012.
If not lets have a conversation.