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Author: lesraatz

20% Business Pass-Through Deduction Opportunity Awaits, But it is Already in Effect and Delay May Cost

Beginning in 2018 new Section 199A permits the owner of a non-C corporation business to deduct up to 20% of the owner’s share of the company’s qualified business income (QBI) from taxable income.  For example, if an owner of an LLC earns $200,000 QBI from its business, then he or she may be able to deduct up to $40,000.  Assuming that the owner is in a 30% tax bracket, the federal tax is reduced by $12,000. There are special limitations on higher income owners tied to payroll and asset costs. One limitation is that the Section 199A deduction cannot exceed 50% of W-2 wages.  But there are techniques to save a bundle by merely adjusting how profits are distributed.  For example, assume an S corporation with one owner-shareholder has taxable income (before the deduction for the owner’s compensation) of $900,000.  If the owner takes $125,000 as employee compensation, the $775,000 balance of income is treated as a taxable distribution to the owner from the company.  Under the rules of Sec. 199A, let’s assume the owner may be entitled to the Sec. 199A deduction of $62,500.  However, if the owner’s salary is raised $125,000 to $250,000 (thereby lowering the shareholder’s S corporation taxable distribution to $650,000), then the Sec. 199A deduction would be $125,000 due to the higher payroll expense.  That change alone could reduce the owner’s income tax by...

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2017 Federal Business Income Tax Legislation

By Les Raatz Republicans are still expected to come up with significant changes in income taxation. The latest proposed significant change is to reduce the maximum marginal federal tax rate on corporations to 20% from its current essential rate of 35%, to lower it to be closer to the rate on business worldwide, and therefore enhance competitiveness of US companies internationally.  However the latest talk is that the maximum federal individual rate of 39.6% might not be reduced to 35%, as had previously been touted. This top rate issue for individuals is not simple. The Trump administration has acknowledged that to be fair to individual business owners, so-called “pass-through” business entities (companies that are taxed directly to the individual business owner, like S Corporations, most LLCs, and partnerships) should also be taxed at or near the anticipated lower corporate rate.  But as this is thought through, there are many dissonant consequences.  An executive of a regular C Corporation potentially would be taxed on her compensation at the 39.6% rate, whereas the owner of a pass-through could be taxed at the new 20% rate for same kind of work. Also, are the professionals at accounting firms, law firms and medical practices, many of which are pass-throughs, able to avail themselves of the 20% rate? Pass-through service firms, notably accounting firms, have recently been by cited by Treasury Secretary Mnuchin as...

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Tax Blog is published by Dickinson Wright PLLC to inform the public of important developments within the firm and practice areas. The content is informational only and does not constitute legal or professional advice. We encourage you to consult a Dickinson Wright attorney if you have specific questions or concerns relating to any of the topics covered in this blog.