The 2017 tax legislation has significant implications for all businesses. That’s why KPMG has created this video series, Tax Reform: Big Changes, Important Questions to help you prepare.
Today’s question is, what’s all the buzz about a new 20 percent deduction for some business owners?
Hey, great question! The buzz is all about a new provision in the tax law that benefits some individuals as well as trusts and estates. The provision may allow for a 20 percent deduction against certain kinds of business income resulting in an effective federal tax rate of 29.6 percent on that income.
So, if you’re a sole proprietor or an owner of a passthrough business—like a partnership or an S corporation—you might be able to benefit. Notice we said, “might.” Whether or not you qualify, and to what degree you might benefit is complicated.
Let’s look at some “if’s.”
The benefit is generally available:
IF the business is not what’s called a “specified service trade or business,”
IF it meets certain limitations based upon the amount of wages paid to employees and the amount of tangible depreciable property that counts as “qualified property.”
Like we said, complicated—and, until you’ve considered closely how the rules apply to your situation, you may be surprised at how much of a benefit you may or may not get.
The IRS released proposed regulations in August of 2018 and final regulations (along with other guidance) on January 18 of this year.
For 2018 returns, taxpayers can rely on either set of regulations—but they have to pick one or the other. They can’t pick and choose some provisions from the proposed regulations and other provisions from the final regulations. And, after 2018, the final regulations govern.
But, while there is more guidance, uncertainty still exists about certain aspects of the deduction.
Plus, determining the benefit for 2018 may involve gathering more information than in prior years—so understanding how the new rules apply to your business and what the requirements are needs to start now.
Also, keep in mind that the 20 percent deduction is only for federal income tax purposes. It’s not relevant for purposes of self-employment tax or net investment income tax. In addition, most states do not allow this deduction on resident or nonresident personal income tax returns.
And, here’s another important point. Although the benefit is available beginning in 2018, it’s scheduled to expire after 2025—unless Congress extends it. The fact that the benefit is temporary makes planning harder—especially as businesses are also trying to understand other provisions of the 2017 tax law and to wrestle with issues, like whether their current tax entity classification—such as partnership, S corporation, or C corporation—still makes the most sense for them.
So, the benefit is significant, but it’s temporary. The rules are complex, and many hurdles must be cleared.
Want to know more? Watch one of our other videos on 199A for more information or visit KPMG’s tax reform Web page: read.kpmg.us/tax-reform.
This video is brought to you by KPMG’s Passthroughs Group, which is led by Debbie Fields. Contact Debbie for more information about the taxation of passthrough entities and KPMG’s services at firstname.lastname@example.org.
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.