Avoid This Silly Mistake With Pass-Through Tax Reduction That Can Cost Thousands of Dollars


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If you have a pass-through entity like an S Corporation, partnership, Schedule C or Schedule E, you have a rather complicated tax change in 2018.

If your taxable income is under $315,000 (married, filing jointly) or $157,500 (single), you will receive the pass-through reduction without any further calculation.

If you have a specified service business and your taxable income is more than$207,500 (individual) or $415,000 (married, filing jointly), you do not get any pass through tax reduction. If your income is between $157,500 and $207,500 (single) or $315,000 and $415,000, the amount you reduce phases out.

For other businesses, you have one more calculation if you’re over the threshold amount. In this case, you need to look at how much your W-2 wages and depreciable assets are. The amount that can be deducted is limited based on the greater of 50% of your W-2 wages or 25% of your W-2 wages and 2.5% of depreciable assets.

In those past few paragraphs, there are a dozen possible traps. I want to just focus on one that I’m going to be talking about with my clients.

You see where it says “W-2 wages.” They mean it, It can’t be employees that are in another one of your companies and you reimburse the other company. Or it can’t be independent contractors. It can’t be leased employees. If you have more than one flow-through entity, make sure you have W-2 employees in each company. Otherwise, a company without W-2 wages, will have wages limited to just 2.5% of the depreciable assets.


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