Unexpected Change in Business Structures with the Trump Tax Plan

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Pass-through entities receive a 20% income reduction. Maybe.

There is a lot to that statement, so let me demonstrate using a real life situation. In this case, it was a married couple who had taxable income on their Form 1040 that was over $315,000.

KEY POINT: The first test is the taxable income limitation. If you’re married filing jointly, the limitation is $315,000. This is taxable income from all sources, not just the pass-through entity.

Since their income was over the taxable income limitation, the next question was whether the pass-through business was a service business or a product business. That’s your choice: service or product? You may also have a blended business, but the tax treatment is still a little up in the air. There’s a strategy for that.

In the early days of tax law change, you can properly make decisions and notify the IRS in a way that puts them quietly on notice. Strategy #5 in “Taxmageddon 2018” walks through how to safely do that.

KEY POINT: Determine what type of business you have. Service? Product? Blended? And the better question, which do you want to be and what will it take to get there?

If you have a service business, you have a second limitation to look at. That is $415K for married filing jointly.

If you have a product business, you don’t have a second limitation.

If you have a service business and your taxable income is between the first and second limitation or a product business, you now need to look at the wage limitation.

That’s the wage limitation. The wage limitation is the greater of 50% of W-2 wages paid/guaranteed payments made or 25% of W-2 wages paid/guaranteed payment + 2.5% depreciable assets.

That’s the rules. Actually, there are more, but let’s start there.

There are already half a dozen strategies in “Taxmageddon 2018” that come into play. How do you turn your service business into a product business or a qualifying blended business? How do you reduce your taxable income so that you can qualify? And what if there is no way around the wage limitation? When does it make sense to pay yourself a salary or take a guaranteed payment from a partnership or LLC? And how much should that be?

With the Trump Tax Plan, the best primary strategy is knowing what questions to ask. If you wait until tax time next year and are looking at your 2018 tax return without planning, chances are you’re going to hear, “If only you had done this last year…” Meanwhile, though, you’re writing a check for thousands of dollars more than you paid last year.

The strategies for all of these topics are part of the 95 strategies in Taxmageddon 2018. You can pick up your “First Look” copy at https://www.ustaxaid.com/shop/taxmageddon-2018/

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