Author Topic: Pass-through business deduction  (Read 6802 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.

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.)

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.

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:

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.

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.


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.

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!

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?

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.

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)!

moonpalace

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Re: Pass-through business deduction
« Reply #18 on: December 13, 2017, 08:21:16 AM »
I'm a tax dummy so please indulge me in what's probably a basic/stupid question:

My wife is a home daycare provider, currently operating as a sole proprietorship. Should she incorporate as either an S-Corp or LLC and take advantage of this pass-through deduction? She has no employees.

Thanks in advance for any guidance (we do have a CPA but figured I'd come here first to smarten up a bit). :-)

DavidAnnArbor

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Re: Pass-through business deduction
« Reply #19 on: December 13, 2017, 12:03:29 PM »
If you read through this thread, she can take advantage of this pass through income deduction as a sole proprietor, as long as her income is below half a million.

SeattleCPA

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Re: Pass-through business deduction
« Reply #20 on: December 13, 2017, 07:08:21 PM »
If you read through this thread, she can take advantage of this pass through income deduction as a sole proprietor, as long as her income is below half a million.

+1

moonpalace

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Re: Pass-through business deduction
« Reply #21 on: December 14, 2017, 05:49:19 AM »
If you read through this thread, she can take advantage of this pass through income deduction as a sole proprietor, as long as her income is below half a million.

+1

Thanks, folks!

terran

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Re: Pass-through business deduction
« Reply #22 on: December 14, 2017, 07:22:48 AM »
If you read through this thread, she can take advantage of this pass through income deduction as a sole proprietor, as long as her income is below half a million.

+1

One little thing: isn't it if their joint income is under $500k (regardless of source)? Or does the limit only apply to the business income?

SeattleCPA

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Re: Pass-through business deduction
« Reply #23 on: December 14, 2017, 11:51:14 AM »
If you read through this thread, she can take advantage of this pass through income deduction as a sole proprietor, as long as her income is below half a million.

+1

One little thing: isn't it if their joint income is under $500k (regardless of source)? Or does the limit only apply to the business income?

The phase-out math starts grinding down the deduction for a business without W-2 wages or for a specified service business if taxable income exceeds $250K for single person and $500K for married couple. Phase-out is complete at $300K for single person and $600K for married couple.

terran

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Re: Pass-through business deduction
« Reply #24 on: December 14, 2017, 12:32:05 PM »
If you read through this thread, she can take advantage of this pass through income deduction as a sole proprietor, as long as her income is below half a million.

+1

One little thing: isn't it if their joint income is under $500k (regardless of source)? Or does the limit only apply to the business income?

The phase-out math starts grinding down the deduction for a business without W-2 wages or for a specified service business if taxable income exceeds $250K for single person and $500K for married couple. Phase-out is complete at $300K for single person and $600K for married couple.

And that would include a spouse's w2 income from another employer, or only the income from the business?

SeattleCPA

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Re: Pass-through business deduction
« Reply #25 on: December 14, 2017, 09:00:15 PM »
If you read through this thread, she can take advantage of this pass through income deduction as a sole proprietor, as long as her income is below half a million.

+1


One little thing: isn't it if their joint income is under $500k (regardless of source)? Or does the limit only apply to the business income?

The phase-out math starts grinding down the deduction for a business without W-2 wages or for a specified service business if taxable income exceeds $250K for single person and $500K for married couple. Phase-out is complete at $300K for single person and $600K for married couple.

And that would include a spouse's w2 income from another employer, or only the income from the business?

Your taxable income... all of it.

E.g., K-1s, Schedule C, Schedule E, W-2s.... minus deductions...equals taxable income.

terran

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Re: Pass-through business deduction
« Reply #26 on: December 18, 2017, 10:46:17 AM »
Any idea how this would interact with a solo 401k? Would the contribution calculations remain the same, or would the deduction have to somehow be accounted for?

According to the Kitces article about the "final" text of the bill (assuming Trump signs it) the pass-through deduction is a below the line deduction on form 1040, which means it's not on schedule C, which is where net profit comes from for the publication 560 worksheet calculation of the solo 401k contribution amount, so it seems like that means it shouldn't factor in? Although, I guess the reduction of the contribution for 1/2 of self employment taxes is also on the 1040, but is integrated into the publication 560 worksheet, so maybe the same will happen with the pass through deduction?

So, say I'm a sole proprietor with $30,000 net profit, married filing jointly with a total taxable income less than the $315k limit, so nothing "strange" happens to the pass through deduction. Does this mean I could deduct $23,191 for the solo 401k contribution ($18.5k employee, $4,691 employer profit share), $2,295 for the employer half of self employment taxes, and $6000 for the 20% pass through deduction, resulting in a total of $31,486 in deductions, or $1,486 more than I made in the business resulting in the business actually reducing the tax paid on other income?

orangepalm

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Re: Pass-through business deduction
« Reply #27 on: December 19, 2017, 01:10:39 PM »
I'm really curious how this shakes out too in relation to a Solo 401(k). It's tough planning ahead not knowing what the new 1040 and other forms will end up looking like.

Too bad Kitces' report says it will be a below the line deduction (it could've been a massive help getting MAGI down for ACA purposes), but I'll take any deduction I can. Having said that, I also don't see how this tax plan is any good for the country as a whole.

protostache

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Re: Pass-through business deduction
« Reply #28 on: December 19, 2017, 01:51:56 PM »
Any idea how this would interact with a solo 401k? Would the contribution calculations remain the same, or would the deduction have to somehow be accounted for?

According to the Kitces article about the "final" text of the bill (assuming Trump signs it) the pass-through deduction is a below the line deduction on form 1040, which means it's not on schedule C, which is where net profit comes from for the publication 560 worksheet calculation of the solo 401k contribution amount, so it seems like that means it shouldn't factor in? Although, I guess the reduction of the contribution for 1/2 of self employment taxes is also on the 1040, but is integrated into the publication 560 worksheet, so maybe the same will happen with the pass through deduction?

So, say I'm a sole proprietor with $30,000 net profit, married filing jointly with a total taxable income less than the $315k limit, so nothing "strange" happens to the pass through deduction. Does this mean I could deduct $23,191 for the solo 401k contribution ($18.5k employee, $4,691 employer profit share), $2,295 for the employer half of self employment taxes, and $6000 for the 20% pass through deduction, resulting in a total of $31,486 in deductions, or $1,486 more than I made in the business resulting in the business actually reducing the tax paid on other income?

It's a below-the-line non-itemized deduction on your personal 1040. Both the 401(k) EE and ER deductions are above the line, so those reduce your AGI. Your business would pass through $30,000 - $18,500 - $4,691 - $2,295 = $4,514 to your AGI. You multiply that by 20% to get $902 for your 199A deduction.

terran

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Re: Pass-through business deduction
« Reply #29 on: December 19, 2017, 02:03:26 PM »
Any idea how this would interact with a solo 401k? Would the contribution calculations remain the same, or would the deduction have to somehow be accounted for?

According to the Kitces article about the "final" text of the bill (assuming Trump signs it) the pass-through deduction is a below the line deduction on form 1040, which means it's not on schedule C, which is where net profit comes from for the publication 560 worksheet calculation of the solo 401k contribution amount, so it seems like that means it shouldn't factor in? Although, I guess the reduction of the contribution for 1/2 of self employment taxes is also on the 1040, but is integrated into the publication 560 worksheet, so maybe the same will happen with the pass through deduction?

So, say I'm a sole proprietor with $30,000 net profit, married filing jointly with a total taxable income less than the $315k limit, so nothing "strange" happens to the pass through deduction. Does this mean I could deduct $23,191 for the solo 401k contribution ($18.5k employee, $4,691 employer profit share), $2,295 for the employer half of self employment taxes, and $6000 for the 20% pass through deduction, resulting in a total of $31,486 in deductions, or $1,486 more than I made in the business resulting in the business actually reducing the tax paid on other income?

It's a below-the-line non-itemized deduction on your personal 1040. Both the 401(k) EE and ER deductions are above the line, so those reduce your AGI. Your business would pass through $30,000 - $18,500 - $4,691 - $2,295 = $4,514 to your AGI. You multiply that by 20% to get $902 for your 199A deduction.

Interesting, so you're saying you think the pass-thru deduction will be after the 401k contribution, not based on the schedule C net profit?

protostache

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Re: Pass-through business deduction
« Reply #30 on: December 19, 2017, 02:13:18 PM »
Any idea how this would interact with a solo 401k? Would the contribution calculations remain the same, or would the deduction have to somehow be accounted for?

According to the Kitces article about the "final" text of the bill (assuming Trump signs it) the pass-through deduction is a below the line deduction on form 1040, which means it's not on schedule C, which is where net profit comes from for the publication 560 worksheet calculation of the solo 401k contribution amount, so it seems like that means it shouldn't factor in? Although, I guess the reduction of the contribution for 1/2 of self employment taxes is also on the 1040, but is integrated into the publication 560 worksheet, so maybe the same will happen with the pass through deduction?

So, say I'm a sole proprietor with $30,000 net profit, married filing jointly with a total taxable income less than the $315k limit, so nothing "strange" happens to the pass through deduction. Does this mean I could deduct $23,191 for the solo 401k contribution ($18.5k employee, $4,691 employer profit share), $2,295 for the employer half of self employment taxes, and $6000 for the 20% pass through deduction, resulting in a total of $31,486 in deductions, or $1,486 more than I made in the business resulting in the business actually reducing the tax paid on other income?

It's a below-the-line non-itemized deduction on your personal 1040. Both the 401(k) EE and ER deductions are above the line, so those reduce your AGI. Your business would pass through $30,000 - $18,500 - $4,691 - $2,295 = $4,514 to your AGI. You multiply that by 20% to get $902 for your 199A deduction.

Interesting, so you're saying you think the pass-thru deduction will be after the 401k contribution, not based on the schedule C net profit?

If you have an S-corp instead of a disregarded entity, 401(k) contributions don't even touch your 1040. The employee side reduces Box 1 W2 wages and the employer side is an expense item on your 1120S. I would expect them to harmonize sole props and S-corps, otherwise a sole prop gets to double deduct the 401(k) contribution.

It depends entirely on how the IRS decides to implement it, of course. In any case, the law states the deduction is capped at your total qualified business income.

Edit: 199A(c)(4)(a) (I think I got that right) exempts from "qualified business income" guaranteed payments or wages. I don't what precedents or regulations around sole prop net income are, but I would be surprised if at least employEE side contributions to a 401(k) plan aren't classified as wages.
« Last Edit: December 19, 2017, 02:23:27 PM by protostache »

protostache

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Re: Pass-through business deduction
« Reply #31 on: December 19, 2017, 02:20:08 PM »
One thing I did notice when reading through the bill text just now is that taxpayers can deduct 20% of qualified REIT dividends. That means REITs are way more interesting to hold in taxable than they were before.

SeattleCPA

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Re: Pass-through business deduction
« Reply #32 on: December 19, 2017, 04:53:51 PM »
One thing I did notice when reading through the bill text just now is that taxpayers can deduct 20% of qualified REIT dividends. That means REITs are way more interesting to hold in taxable than they were before.

The treatment of REITs does make one think maybe REITs don't automatically need to go into tax deferred.

I haven't actually done the math myself yet, though... (be interesting if someone else does that and posts here...)

jpdx

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Re: Pass-through business deduction
« Reply #33 on: December 20, 2017, 11:27:27 PM »
Now that this bill is about to be signed into law, do we know if the 20% pass-through deduction reduces MAGI thereby increasing ACA tax credits?

Also, we'll be filing our 2018 tax return on a post card, correct? ;)

brooklynguy

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Re: Pass-through business deduction
« Reply #34 on: December 21, 2017, 07:21:39 AM »
Now that this bill is about to be signed into law, do we know if the 20% pass-through deduction reduces MAGI thereby increasing ACA tax credits?

The deduction does not reduce AGI (and therefore does not reduce MAGI), yet even though it is a below-the-line deduction it can still be claimed by taxpayers who do not itemize (see the amendments to Sections 62(a) and 63(b) of the tax code implemented by the bill, which can be found on page 43 of this pdf).

bacchi

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Re: Pass-through business deduction
« Reply #35 on: December 21, 2017, 10:34:04 PM »
They really simplified the tax code.

SeattleCPA

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Re: Pass-through business deduction
« Reply #36 on: December 22, 2017, 07:24:45 PM »
They really simplified the tax code.

+1 :-(

TexasRunner

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Re: Pass-through business deduction
« Reply #37 on: December 29, 2017, 03:20:47 PM »
Here's the blog post I did Saturday morning a few hours after Senate passed its version.


I'm still hung up on sole proprietorship....  You mention it at the beginning but nowhere after.  (Great Post By The Way!!!)



Example:

My situation is 60k-85k W2 income (changes based on bonuses) and (hopefully) about 25k-30k sole proprietorship income, with the potential for more...   Does that mean in a hypothetical 30k sole P year I can cut 20% of "profits" (I have no real overhead) out before taxes, thus taxing only 24k of the 30k earnings at my nominal rate?  (If I can CPA magic some deductions (which there could be some), those stack with this deduction correct?)

Aside from the Solo-401k issues, how convoluted does this get once combined with personal taxes (in the instance of sole proprietorships...)?  I'm guessing everything has to be calculated BEFORE line item addition to the return to keep it simple?  Thus artificially reducing the 1099 income before it goes on the 1040?
« Last Edit: December 29, 2017, 05:31:06 PM by TexasRunner »

ickhos

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Re: Pass-through business deduction
« Reply #38 on: December 29, 2017, 06:16:41 PM »
Does this mean I could deduct $23,191 for the solo 401k contribution ($18.5k employee, $4,691 employer profit share), $2,295 for the employer half of self employment taxes, and $6000 for the 20% pass through deduction, resulting in a total of $31,486 in deductions, or $1,486 more than I made in the business resulting in the business actually reducing the tax paid on other income?


Can you 'deduct' the employee contribution to a Solo 401K from profits? I thought it could only come out of W-2 wages.



If you consistently lose money in a business, the IRS may take notice and classify it as a hobby and you won't be able to take any deductions from it.

SeattleCPA

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Re: Pass-through business deduction
« Reply #39 on: December 30, 2017, 10:46:57 AM »
Here's the blog post I did Saturday morning a few hours after Senate passed its version.


I'm still hung up on sole proprietorship....  You mention it at the beginning but nowhere after.  (Great Post By The Way!!!)



Example:

My situation is 60k-85k W2 income (changes based on bonuses) and (hopefully) about 25k-30k sole proprietorship income, with the potential for more...   Does that mean in a hypothetical 30k sole P year I can cut 20% of "profits" (I have no real overhead) out before taxes, thus taxing only 24k of the 30k earnings at my nominal rate?  (If I can CPA magic some deductions (which there could be some), those stack with this deduction correct?)

Aside from the Solo-401k issues, how convoluted does this get once combined with personal taxes (in the instance of sole proprietorships...)?  I'm guessing everything has to be calculated BEFORE line item addition to the return to keep it simple?  Thus artificially reducing the 1099 income before it goes on the 1040?

If your sole proprietorship makes $30K in profit, you get a $6000 Sec. 199A deduction. E.g., if your venture generates $35K in revenues and you cobble together $5K of business expenses, your profit equals $30K and the deduction equals 20% of the $30K.

BTW, if you drive your profit down to, say, $20K because you load the Schedule C with expenses, now your Sec. 199A deduction equals 20% of the $20K, or $4K.

DavidAnnArbor

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Re: Pass-through business deduction
« Reply #40 on: December 31, 2017, 12:42:54 PM »
What is a deduction?  Is this something that lowers the taxable income.  Or is this a dollar for dollar reduction in federal income taxes ?

maizeman

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Re: Pass-through business deduction
« Reply #41 on: December 31, 2017, 12:49:21 PM »
What is a deduction?  Is this something that lowers the taxable income.  Or is this a dollar for dollar reduction in federal income taxes ?

A $1000 deduction lowers your taxable income by $1000 (and thus will reduce your taxes owed by some amount less than $1000).

Something that reduces your federal income tax owed directly is a credit. A $1000 tax credit means you pay $1000 less in tax than you otherwise would have.

tj

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Re: Pass-through business deduction
« Reply #42 on: December 31, 2017, 02:24:55 PM »
Does this mean I could deduct $23,191 for the solo 401k contribution ($18.5k employee, $4,691 employer profit share), $2,295 for the employer half of self employment taxes, and $6000 for the 20% pass through deduction, resulting in a total of $31,486 in deductions, or $1,486 more than I made in the business resulting in the business actually reducing the tax paid on other income?


Can you 'deduct' the employee contribution to a Solo 401K from profits? I thought it could only come out of W-2 wages.



If you consistently lose money in a business, the IRS may take notice and classify it as a hobby and you won't be able to take any deductions from it.

Sole proprietors don't get W-2 wages. Sole proprietors can have solo 401k's. :)

TexasRunner

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Re: Pass-through business deduction
« Reply #43 on: December 31, 2017, 08:29:21 PM »
Does this mean I could deduct $23,191 for the solo 401k contribution ($18.5k employee, $4,691 employer profit share), $2,295 for the employer half of self employment taxes, and $6000 for the 20% pass through deduction, resulting in a total of $31,486 in deductions, or $1,486 more than I made in the business resulting in the business actually reducing the tax paid on other income?
Can you 'deduct' the employee contribution to a Solo 401K from profits? I thought it could only come out of W-2 wages.

If you consistently lose money in a business, the IRS may take notice and classify it as a hobby and you won't be able to take any deductions from it.
Sole proprietors don't get W-2 wages. Sole proprietors can have solo 401k's. :)

Ya, its AWESOME.  I'm surprised more are not aware of this savings hack...

If your sole proprietorship makes $30K in profit, you get a $6000 Sec. 199A deduction. E.g., if your venture generates $35K in revenues and you cobble together $5K of business expenses, your profit equals $30K and the deduction equals 20% of the $30K.

BTW, if you drive your profit down to, say, $20K because you load the Schedule C with expenses, now your Sec. 199A deduction equals 20% of the $20K, or $4K.

Thanks for the clarification, thats how I was understanding it.  The 20% deduction is (essentially for a sole prop) simply Sole Prop profits x 20% x Nominal tax rate for personal taxes.  That'll equal what the bill saves a sole P in dollars.

IE 35,000 income - 5000 deductions = 30,000        30,000 x .20 x .15 (basic tax rate) = 900$ savings on tax

It appears more complicated since it has to address S-Corps and all the other varieties, but it seems (now) to be pretty straightfoward.

Again, great blog post.  Very helpful.  If you do another on the gaurdrails or any of the other aspects, be sure to post it.  Quite helpful.

BTDretire

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Re: Pass-through business deduction
« Reply #44 on: January 01, 2018, 07:35:44 AM »
Not sure if we qualify for the pass through.
Self employed, sole proprietorship, Schedule C in my name, with all expenses including a line for
contract labor (my wife). Wife has a Schedule C showing her income as the contract labor from my Schedule C.  No employees. Filing jointly.

 Anyone know if we qualify?

DavidAnnArbor

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Re: Pass-through business deduction
« Reply #45 on: January 01, 2018, 07:40:45 AM »
Not sure if we qualify for the pass through.
Self employed, sole proprietorship, Schedule C in my name, with all expenses including a line for
contract labor (my wife). Wife has a Schedule C showing her income as the contract labor from my Schedule C.  No employees. Filing jointly.

 Anyone know if we qualify?

Sole proprietors qualify.

SeattleCPA

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Re: Pass-through business deduction
« Reply #46 on: January 01, 2018, 08:19:19 AM »
Not sure if we qualify for the pass through.
Self employed, sole proprietorship, Schedule C in my name, with all expenses including a line for
contract labor (my wife). Wife has a Schedule C showing her income as the contract labor from my Schedule C.  No employees. Filing jointly.

 Anyone know if we qualify?

Agree with David... Sole proprietors can use deduction. But if your family's taxable income gets high enough, two special rules kick in... RULE #1: your sole proprietorship's deduction can't exceed 50% of your W-2 wages or 25% of your W-2 wages plus 2.5% of your depreciable assets (whichever is greater)... RULE #2: you can't be in a specified service trade or business which is basically a white collar profession (er, except construction engineers and architects)... and can't be an athlete... or a performing artist... or a business where proprietor's skill or reputation is the principal asset of the business.

I did do another blog post on the principal asset issue here:

https://evergreensmallbusiness.com/pass-thru-entity-deduction-principal-asset/

BTW, the special rules start kicking in at $157,500 in taxable income for a single filer ad $315,000 in taxable income for a married filed joint filer. The special rules have fully kicked in by $207,500 in taxable income for single person or $415,000 taxable income for married person.

Final comment: The 50% of W-2 Wages rule would be easy for a sole proprietor with high income to get around... just operate as an S corporation. The specified service business rule pretty much impossible to game.

BTDretire

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Re: Pass-through business deduction
« Reply #47 on: January 01, 2018, 09:09:02 AM »
Not sure if we qualify for the pass through.
Self employed, sole proprietorship, Schedule C in my name, with all expenses including a line for
contract labor (my wife). Wife has a Schedule C showing her income as the contract labor from my Schedule C.  No employees. Filing jointly.

 Anyone know if we qualify?

 OK, We have no W2 income, we have a retail business and our income is a quarter of the limit.
  So, as you see it, the way we claim our income, Schedule C's, one contract labor is not a problem? (My accountant has been doing it this way for 12 years, someone suggested it should be a partnership)
 Now, if our business income is $75k line 12, our AGI is $70k line 37, and our total income is $100k line 22 from dividends and interest:
 What line does the 20% pass through affect.
 Is it 20% off line 12?
EDIT;
 I'm contemplating Roth coversions for 2018, does that have any bearing on the 20%,
other than allowing me to convert more and stay in the same tax bracket.
                    Thanks
« Last Edit: January 01, 2018, 09:29:27 AM by BTDretire »

CanuckExpat

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Re: Pass-through business deduction
« Reply #48 on: January 01, 2018, 02:01:01 PM »
The 20% deduction won’t reduce MAGI for ACA calculations correct?

DavidAnnArbor

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Re: Pass-through business deduction
« Reply #49 on: January 01, 2018, 02:13:26 PM »
The 20% deduction won’t reduce MAGI for ACA calculations correct?

That's correct because the deduction occurs below the line for AGI