We have a brand new deduction this year, 2018. It’s the 20% income deduction, also known as Section 199A.
In the blog from Friday, November 16, 2018 we talked about the key terms. Now we’re going to use them for a few calculations.
First of all, what is your taxable income? If it’s under $315K (married, filing jointly) or $157.5K (single), you do not need to worry about further limitations. You’ll be able to take the 20% income deduction for qualified business income (QBI).
If it’s over that amount, the next question is whether your business is a SSTB? If so, you have a second income threshold to be concerned with. This is $415K (married filing jointly) or $207.5 (single). If your taxable income is over the second threshold, you can’t take any 20% income deduction. Between the two limitations, the amount you can deduct is phased out.
If you have a non-SSTB business, the only income limitation concern is the first limit. Once you have gone over the taxable income threshold ($315K or $157.5K), you have to take the wage limitation into account.
With the wage limitation, you may still get the deduction but there is another deciding factor. It is limited by 50% of wages paid (includes guaranteed payments from partnerships) or 25% of wages paid and 2.5% of the unadjusted basis of depreciable assets.
Those are the rules. Now, what are the strategies? As a rule of thumb, if your income is under the $315K/$157.5 threshold, the 20% income deduction is going to work well for you. You will want to calculate how much salary to take from an S Corp, if you have one. You do need to take a salary, according to the IRS, but remember the salary does not qualify as part of the eligible 20% income reduction.
If your income is over that amount, your next question is whether you have an SSTB. If so, you may not have a lot of strategy options. If you have a blended business, you may want to consider dividing out the SSTB and the non-SSTB income components. Watch the income limitation.
And definitely read Sunday, November 18, 2018’s blog. We’ll talk about some of the new strategies for C Corporation and when they work and when they don’t in 2018.