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Tax law changes leave many small business owners uncertain

On Behalf of | Feb 4, 2019 | Uncategorized |

The new tax law signed by the President in December 2017 has left some business owners unclear of whether they qualify for a new deduction. According to The Star Tribune, though the IRS laid out guidelines for the business deduction, even some tax advisers have questions about what qualifies.

Law change opens deductions to more companies

The new deduction is for sole proprietors, partners and S corporation owners, and it can allow them to exempt one-fifth of their income from taxes. These types of companies are known as pass-through companies because the income from their businesses passes through to the owners’ 1040 tax forms. Previous tax law did not allow these businesses to get some of the tax benefits that corporations enjoy.

However, the change in tax law permits some of these companies to deduct 20 percent of qualified business income. The confusion lies in exactly who qualifies for this deduction.

Income affects whether businesses qualify

One stipulation for the deduction is taxable income for an individual cannot be over $157,500 or $315,500 for a married couple. However, even small business owners with an income over these thresholds may qualify for a partial deduction. How much the companies pay employees and the value of company property affects how much of a break people over the threshold can receive. A tax professional or tax attorney should be able to calculate how these numbers affect a company’s deduction.

Some types of businesses are excluded

The other factor that affects eligibility for the deduction is what kind of business you own. If you are a specific service trade or business, like a health care provider, attorney, accountant or consultant, if your taxable income is over $207,500 for an individual or $415,00 for a married couple, you do not qualify for the deduction.

Partial deductions may be possible

However, there are exceptions to this rule as well. A specific service trade companies may be able to claim this deduction on part of their income. For example, an optometrist that also sells glasses and contacts may be able to claim the deduction on this part of his or her income. They just would not be able to claim a deduction on income from caring for patients. However, business owners may need to provide separate records for these different kinds of work.

The IRS guidelines regarding this deduction are not completely firm, but the agency said companies can use these to pay their 2018 taxes. Some tax professionals have already asked the IRS to clarify many things regarding the deduction. Any business owner that is wondering what, if any portion of his or her income qualifies should reach out to an experienced tax professional.