The Treasury Dept issued Temporary Regs on 8/8/18 regarding the 20% pass-through income reduction part of the Trump Tax Plan. We’ve had 7 past posts going through the 27 changes or clarifications to the Trump Tax Plan. Make sure you go back to take a look at those.
Today, we’re gong to look at some situations that the Temporary Regs gave us and work through situations.
How Multiple Businesses Can Take the 20% Pass-Through Reduction
Let’s say you’re single and have 3 Schedule C (Sole Prop) businesses, Business #1, Business #2 and Business #3. You may report as a Schedule C if you have a single member LLC and have not elected to be taxed as another type of taxing entity. That doesn’t matter. In this case, it’s simply what type of entity you use for federal tax purposes.
None of the businesses have UBIA (unadjusted basis immediately after acquisition) from qualified property, but there are wages paid from some.
Business #1: $1,000,000 of QBI and pays $500,000 of W-2 wages
Business #2: $1,000,000 of QBI and zero W-2 wages.
Business #3: $2,000 of QBI and $500,000 of W-2 wages.
You also have some other income and after that and allowable deductions, your taxable income is $2,722,000. Obviously, you have exceeded the taxable income limit for a single taxpayer of $157,500.
That means your Section 199A deduction (20% pass-through reduction) is subject to W-2 wages and UBIA of qualified property. The limitations are applied on a business-by-business basis. Since there is no UBIA, only the 50% of W-2 wage limitation is calculated.
Business #1: The lesser of 20% of QBI (20% x $1,000,000 = $200,000) and 50% of wages (50% x $500,000 = $250,000) is $200,000.
Business #2: The lesser of 20% of QBI (20% x $1,000,000 = $200,000) and 50% of wages (50% x 0 = 0) is $0.
Business #3: The lesser of 20% of QBI (20% x $2,000 = $400) and 50% of W-2 wages (50% x $500,000 = $250,000) is $400.
The combined total of these is $200,400. That amount needs next to be compared to the sum of your taxable income. That is $544,400 (20% x $2,722,000).
Since the Code 199A deduction amount is less than that figure, the full amount of $200,400 will be allowed.
Now let’s take the same assumptions as the previous example (Businesses #1, #2 and #3) but in this case, you are allowed to aggregate the businesses and you decide to make that election.
Your taxable income is above the threshold amount and so you are subject to the wage limitation. Since the businesses are aggregated, the limitations are applied on an aggregated basis.
The total QBI is $2,002,000. The total wages are $1,000,000. That means that the QBI would be $400,400 and the limitation is $500,000.
Your deduction under the aggregated method would be $400,400. That’s quite a bit different from having the businesses stand alone. It should be noted that you can’t use the aggregated method if one or more of the businesses are SSTB.
As with most things in tax law, you need to have a strategy. When it comes to the question of aggregating multiple businesses, you need to see which will be the best for your particular situation.
The above examples come from “Flow-Through Businesses and the Tax Cuts and Jobs Act Home Study Course” available at https://www.ustaxaid.com/coaching-program/ through November 2018.