Author Topic: Pass-through business deduction  (Read 761 times)

jpdx

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Pass-through business deduction
« on: December 03, 2017, 12:19:02 AM »
The GOP tax bill still needs to go to Conference, but does anyone know the details of the 23% deduction of pass-through income?

Does this deduction reduce MAGI, or is it an itemized deduction? If if reduces MAGI, it would increase your ACA tax credit (finding this hard to believe).
« Last Edit: December 03, 2017, 12:30:24 AM by jpdx »

jpdx

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Re: Pass-through business deduction
« Reply #1 on: December 03, 2017, 08:34:42 PM »
I'm surprised no one is talking about this. It's kinda a big deal.

SeattleCPA

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Re: Pass-through business deduction
« Reply #2 on: December 04, 2017, 06:15:35 AM »
Here's the blog post I did Saturday morning a few hours after Senate passed its version.

https://evergreensmallbusiness.com/sec-199a-qualified-business-income-deduction/

The deduction *is* a big deal. It gives passthrough entities a deduction equal to 23% of their "qualified business income," subject to some limitations.
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jpdx

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Re: Pass-through business deduction
« Reply #3 on: December 04, 2017, 10:28:16 AM »
Thank you for that blog post! It's a great resource and breaks this down in a way that is easy to understand.

To reiterate the big deal regarding health insurance, the 23% deduction would mean that people who purchase ACA plans will now qualify for larger tax credits, or in some cases qualify for tax credits for the first time. For example, a family of 3 with $100k of pass-through income would ordinarily not receive any premium tax credits, but if this becomes law, then that family's income would be reduced to $77k and they would qualify.

Do I understand this correctly? I would love a confirmation because I find it hard to believe that the GOP would do anything to increase ACA spending!
« Last Edit: December 04, 2017, 08:30:49 PM by jpdx »

Abe

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Re: Pass-through business deduction
« Reply #4 on: December 04, 2017, 10:34:25 AM »
Essentially all 1099 employees should try to incorporate into a pass-through corporation then, right?

I'm going to see about doing this once I'm in practice as a surgeon. I think a lot of people can sneak under the $250k limit with maxing employee and employer-side contributions to a 401(k).

SeattleCPA

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Re: Pass-through business deduction
« Reply #5 on: December 04, 2017, 01:17:45 PM »
Thank you for that blog post! It's a great resource and breaks this down in a way that is issue to understand.

To reiterate the big deal regarding health insurance, the 23% deduction would mean that people who purchase ACA plans will now qualify for larger tax credits, or in some cases qualify for tax credits for the first time. For example, a family of 3 with $100k of pass-through income would ordinarily not receive any premium tax credits, but if this becomes law, then that family's income would be reduced to $77k and they would qualify.

Do I understand this correctly? I would love a confirmation because I find it hard to believe that the GOP would do anything to increase ACA spending!

The 23% is applied to either passthrough income or taxable income... so in your example, because of deductions the taxable income would be less than $77K.

Also, I think the question about ACA-related credits is impossible to answer at this point. Maybe I missed that in my reading. But I would not be surprised if the 23% deduction is ignored for that purpose. (The 23% deduction is ignored for other taxes and credits. E.g., self-employment taxes.)
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SeattleCPA

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Re: Pass-through business deduction
« Reply #6 on: December 04, 2017, 01:19:09 PM »
Essentially all 1099 employees should try to incorporate into a pass-through corporation then, right?

I'm going to see about doing this once I'm in practice as a surgeon. I think a lot of people can sneak under the $250k limit with maxing employee and employer-side contributions to a 401(k).

At first, because I missed a little paragraph, I thought you would need to set up a corp to get the wages which plug into the 23% deduction's calculations... but actually that won't matter to you. If your taxable income is less than $250K, you won't be subjected to the W2 wages limitation... and you won't be disqualified because you're in a specified service activity.
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Abe

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Re: Pass-through business deduction
« Reply #7 on: December 04, 2017, 09:31:08 PM »
Awesome. I can't wait until someone in Congress whines "but those are the wrong rich people we wanted to give free money to!"

TaronM

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Re: Pass-through business deduction
« Reply #8 on: December 05, 2017, 11:45:09 AM »
I came here wondering the same thing - is the pass-through deduction "above the line", affecting AGI, or "below the line", only affecting final tax bill?  Above-the-line deduction would also potentially lower MAGI which is used for ACA credits (among other things).  And we're sure it doesn't affect self-employment tax then?  So below-the-line sounds like.

We kinda need to know this stuff in order to accurately pay Estimated Quarterly Taxes, especially if you prefer to save and invest money by not paying more EQT than you need to by using the Annualized Income Installment method, which basically means you need to work out all your taxes 4 times a year.  With these complex changes, I'm thinking the annualized method may be impossible to do for next year since we won't likely know for sure what the actual Form 2210 and 1040 will look like for this stuff until early 2019 :(.

EDIT: And so if I get a bunch of income in a single year, if I don't have W2 employees I don't get the deduction at all?  Crap, the way my business works I get a big payout all in one year (product release) and then like nothing for the next 3-4 years.  Also, this is going to be really really hard to integrate into my EQT tracking spreadsheet ( https://docs.google.com/spreadsheets/d/13NUmJCJF70noiBjL-ioFtv-ddsTzSqVwThHx8brBL7c/ ).

So much for the promise of making taxes "simpler" with this bill :P.
« Last Edit: December 06, 2017, 11:48:09 AM by TaronM »

protostache

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Re: Pass-through business deduction
« Reply #9 on: December 05, 2017, 01:41:17 PM »
SeattleCPA, could you help me interpret part of the bill (specifically, this text)?

Section 199A(d)(1) says this:

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IN GENERAL.—The term ‘qualified trade or business’ means any trade or business other than a specified service trade or business or the trade or business of performing services as an employee.

But then 199A(d)(3)(A)(i) says that if you're under the threshold amount ($250k individual, $500k married) plus $50k then:

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(i) the exception under paragraph (1) shall not apply to specified service trades or businesses of the taxpayer for the taxable year

Does that refer to the entirety of paragraph (1)? If so, income from "the trade or business of performing services as an employee" would seem to be included in the threshold phaseout, meaning anyone making less than that can claim the deduction as an employee.

This question is inspired by this article, but it seems like that article was referring to an earlier draft before they "fixed" it.

Gumption

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Re: Pass-through business deduction
« Reply #10 on: December 06, 2017, 10:05:41 AM »
SeattleCPA...thanks very much for disseminating this information. Very helpful.
Good to see that they allow Service corps in the mix now.
Interesting how the House version wanted to remove pass through income all together and the Senate version not only allows it, but gives a generous tax deduction for it.

Although the Senate version would benefit me greatly, I still feel this bill is so wrong on so many levels and will have a negative results on the economy and general state of the country.

SeattleCPA

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Re: Pass-through business deduction
« Reply #11 on: December 06, 2017, 11:18:40 AM »
SeattleCPA, could you help me interpret part of the bill (specifically, this text)?

Section 199A(d)(1) says this:

Quote
IN GENERAL.—The term ‘qualified trade or business’ means any trade or business other than a specified service trade or business or the trade or business of performing services as an employee.

But then 199A(d)(3)(A)(i) says that if you're under the threshold amount ($250k individual, $500k married) plus $50k then:

Quote
(i) the exception under paragraph (1) shall not apply to specified service trades or businesses of the taxpayer for the taxable year

Does that refer to the entirety of paragraph (1)? If so, income from "the trade or business of performing services as an employee" would seem to be included in the threshold phaseout, meaning anyone making less than that can claim the deduction as an employee.

This question is inspired by this article, but it seems like that article was referring to an earlier draft before they "fixed" it.

I'll try to post a longer explanation later--this thing is really complicated in places--but this stress reducer for most everybody...

Though the law disqualifies specified service trades or businesses from using the Sec. 199A deduction and also requires you to pay $2 in wages for every $1 in deduction, these restrictions/limitations don't apply if your taxable income equals $250K or less and you're single... or $500K or less and you're married filing jointly.

That protects *almost* everybody.

BTW, if your income falls into a band ($250K to $300K for singles and $500K to $600K for married folks filing jointly) then there's a phase-out where the law starts to make you comply with the requirements for big businesses.

Further, once you're above the $300K or $600K taxable income line, you can't use deduction unless qualified business income is *not* from a specified service business and you have the required W-2 wages inside the entity.

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SeattleCPA

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Re: Pass-through business deduction
« Reply #12 on: December 06, 2017, 11:22:53 AM »
SeattleCPA...thanks very much for disseminating this information. Very helpful.
Good to see that they allow Service corps in the mix now.
Interesting how the House version wanted to remove pass through income all together and the Senate version not only allows it, but gives a generous tax deduction for it.

Although the Senate version would benefit me greatly, I still feel this bill is so wrong on so many levels and will have a negative results on the economy and general state of the country.

Law does seem funny in places to me, too. But a couple of interesting points... first, in order to get the deduction, if you're big, you need to be paying $2 of wages for every dollar of deduction. So it's sort of an incentive to employ people and bump wages...

Second, the deduction isn't available for people working outside country... so there's an incentive to come back to US and do your thing here...

Third, the specified service trade or business thing means that people who make a lot of money and work in a white-collar profession where the income reflects, really, their employment earnings, get disqualified.

All that said, as a voter and parent and citizen, seems, hmmm, sort of crazy to borrow money to give businesses a tax break.
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jpdx

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Re: Pass-through business deduction
« Reply #13 on: December 06, 2017, 08:49:06 PM »
Quote
The term ‘qualified trade or business’ means any trade or business other than a specified service trade or business or the trade or business of performing services as an employee.

Doesn't this seem ripe for abuse?

Quote
...as a voter and parent and citizen, seems, hmmm, sort of crazy to borrow money to give businesses a tax break.

+1

Mr Mark

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Re: Pass-through business deduction
« Reply #14 on: December 06, 2017, 09:50:21 PM »
I guess it depends of your definition of 'abuse'!

I'd imagine if I was in a white collar enterprise that's excluded I could separate my business into two passthrough. One engaged in the excluded activity and the other providing business services to my excluded business - office support, secretarial, catering, HR, IT, commercial lease management etc.

Sounds like lots of great opportunity for the magic done by CPAs!
Mr. Mark

katsiki

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Re: Pass-through business deduction
« Reply #15 on: December 07, 2017, 08:24:30 PM »
Can anyone clarify the industry exclusion?  Would a software company be excluded?
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SeattleCPA

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Re: Pass-through business deduction
« Reply #16 on: December 08, 2017, 12:40:13 PM »
Can anyone clarify the industry exclusion?  Would a software company be excluded?

Software consulting (including programming, 1099 contracting as developer) will get roped into the specified service business thing.

However, if you are selling software (downloadables, games, apps, etc), that's not going to be included in the specified service business thing.
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katsiki

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Re: Pass-through business deduction
« Reply #17 on: December 08, 2017, 01:12:35 PM »
Thank you for clarifying that (and the rest in this thread)!
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