March 27, 2024
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Deal Alert! Tax Reform’s New Big Deduction

Who doesn’t love a good deal? That’s why we check Dan’s Deals, Slickdeals, Brad’s Deals, Fatwallet and Groupon. But it’s not as simple as getting a good price on something you need—it’s so much more than that. It’s the thrill of the find that gets our blood pumping. This explains why according to a study conducted by Consumer Reports, 23 percent of women say they often buy things they don’t need just because they’re on sale.

That’s a staggering percentage, but it’s also not surprising. It may help explain why you booked a one-way ticket to Greece or bought that kayak paddle for $7 when you don’t even own a kayak, just because you got an alert from Dan that there was a possible price mistake. (FYI, that kayak paddle deal alert really happened. That’s what we’ve come to.)

Usually, we just think of getting deals at online retailers, but surprisingly, you can score yourself a big deal with the IRS this year. Under the new tax reform laws, there is a new deduction under Code Section 199A. There are many rules, which are all new and some still unclear, but there is a good chance that you can get a huge benefit from this new deduction.

If you operate your business as a sole proprietorship, partnership or S corporation, then you may qualify for some or all of the new 20 percent deduction.

The Basics

When can you as a business owner qualify for this new 20 percent tax deduction with almost no problems?

To qualify for the full 20 percent with almost no problems, you need two things: First, you need qualified business income from one of the sources above to which you can apply the 20 percent. Second, you need “defined taxable income” of $315,000 or less if married filing a joint return, or $157,500 or less if filing as a single taxpayer.

Example. You’re married and operate your business as a sole proprietorship. The business earns $250,000 of qualified business income. Your other income and deductions result in taxable income of $300,000. You qualify for a deduction of $50,000 ($250,000 x 20 percent).

If you operate your business as a partnership or S corporation and you have the same qualified business income and taxable income numbers above, you’ll get the same $50,000 deduction. The same is true if your income comes from a rental property, real estate investment trust or limited partnership.

Service Business

Things get a bit more complicated if you are what Section 199A calls a specified service trade or business, such as a law or accounting firm. But if the doctor, lawyer, actor or accountant has taxable income less than the thresholds above, they qualify for the full 20 percent deduction.

In other words, if you were a lawyer (or any service business) with the same facts as in the example above, you would qualify for the $50,000 deduction.

Once your taxable income exceeds the phaseout range ($207,500 single, $415,000 married filing jointly), you will get zero deduction if you are in a service business. The only way you can qualify for the Section 199A deduction when your taxable income exceeds the phaseout range is when you are not a service business and your business pays you W-2 wages and/or has property.

Partial Deduction

So to summarize so far—if your taxable income is $315,000 or less if married filing a joint return, or $157,500 or less if filing as a single taxpayer, then you qualify for the entire 20 percent deduction. If your income exceeds $415,000 if married filing a joint return, or $207,500 filing as a single taxpayer, then it depends if you are a service business or not: A service business will get you no deduction at all, while a non-service business will get you a partial deduction.

What if your taxable income is between $315,001 and $415,000 (married) or $157,501 and $207,500 (single)? You get a partial deduction. But the deduction is calculated differently if your business is a service business versus non-service business.

Calculating the partial deductions requires a bit of work and know-how, so speak to your accountant to see how much you can yield from this deduction. If you have any questions about this deduction feel free to reach out to me. I’ve created a tax calculator that provides you with your deduction whether you are in a service business or not, so if you are curious about your deduction you can contact me.

By Daniel Magence, CPA, Esq.


Daniel Magence, CPA, Esq., is a principal at Pristine CPA Solutions, LLC (www.pristinecpa.com). Pristine CPA Solutions offers tax and accounting services to individuals and businesses of all sizes, whether it’s tax returns, bookkeeping, payroll services or personal income budgeting. He can be reached at [email protected] or 201-326-6908 if you have any questions or comments, or are interested in using Pristine CPA’s services. Feel free to contact us for a free consultation.

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