Tax Cuts and Jobs Act Denies 20 Percent Pass-Through Deduction to Some
The Tax Cuts and Jobs Act, passed and signed this past December 2017, was touted as a boon to individuals and businesses alike. Where professional services firms (law, accounting, financial services, etc.) are concerned, that’s partially true.
If your service-based business is a pass-through entity, like a sole proprietorship, LLC, or S Corporation, your tax obligation, as you know, is based on your individual tax rate. There are still seven brackets, but they now range from 10-37 percent, while the C Corporation rate has dropped to 21 percent. Your firm may benefit from the reduction of individual rates.
The new law also contains a provision for pass-through entities that allows them a deduction of up to 20 percent of Qualified Business Income (QBI). This benefit, though, will be pro-rated for specified business services whose taxable income exceeds $157,500 (single filers) or $315,000 (joint filers). Once single filers hit $207,500 and joint filers, $415,000, there is no QBI at all for these specified business services (regulations still forthcoming).
Some Positive Changes
Other potential benefits of the new law include:
- 100 percent bonus depreciation. Both new and used property will be eligible if it was placed into service after September 27, 2017.
- Short-lived capital investments. You can now expense them at 100 percent for five years.
- Section 179 deduction. This has become more generous. It’s important to keep your numbers below the following thresholds:
- previously you were allowed to deduct the cost of property you purchased for business use up to $510,000 in one tax year
- you’ll now be able to deduct up to $1 million, provided as before, that the property is used for business more than 50 percent of the time
- the phaseout threshold begins at $2.5 million
In addition to the items above, a review of your retirement plan and retirement plan options may also be helpful in potentially reducing your taxable income below the thresholds listed above.
Expert Interpretation Needed
Keep in mind, we are still waiting for regulations so that we can fully interpret this law, and most importantly how it impacts you directly. After the 2025 tax year, some of these provisions are set to phase out. We can help your professional services firm determine how your 2018 income taxes will be affected. Connect with us soon, so you can do any related tax planning required before year’s end.