Since Congress passed the Tax Cuts and Jobs Act (the “Act”) on December 20, 2017, tax professionals and the general public alike have been grappling to understand the Act’s full implications.
One noteworthy change brought about by the Act is a new 20 percent deduction of certain business income for qualifying pass-through entities. The pass-through deduction sounds attractive to many individuals, estates, and trusts, but the details give rise to more questions.
Qualifying for 20 percent pass-through deduction
Under the Act, individuals, estates, and trusts may now deduct up to 20% of their qualified business income (“QBI”) and up to 20 percent of their qualified real estate investment trust (“REIT”) dividends from qualifying pass-through entities. This benefits the owners of a:
- Sole proprietorship
- LLC (single or multiple members)
- S corporation
However, the pass-through deduction is more complicated than it sounds. If the taxpayer’s taxable income is less than $157,500 for an individual or $315,000 for a married couple, the 20% pass-through is a straight deduction. But if the taxable income exceeds those limits, the 20% could be reduced based on the amount paid by the business in W-2 wages. For certain professionals, including those in health, accounting, law, or investments, the 20% deduction may be allowed until the taxable income reaches $207,00 for single individuals or $415,000 for married couples. After the threshold is met, the deduction is not allowed.
Act raises questions about pass-through deduction
The Act calls into question what is compensation and what is a business distribution. It encourages business owners to characterize funds as business profits rather than salary. However, tax preparers, who may be liable for penalties, face competing interests. Increasingly, their clients prefer to see pass-through of business profits in order to lower the tax burden, while the Internal Revenue Service may intend such compensation to be accounted for as owner salary.
Industry professionals and watchdogs have called on the IRS to resolve these conflicts sooner rather than later. Taxpayers do not merely report their income at the end of the year; they rely upon authoritative interpretations of the laws when deciding how to structure their operations well in advance of tax prep season.
It is always important for tax professionals, including tax lawyers and accountants, to stay abreast of changes in the federal and state tax laws. With the dramatic change 2017 brought to the federal tax landscape, it is more important than ever to understand and act upon the most current information.
Consult with a Baltimore tax attorney at Rosenberg Martin Greenberg
The Maryland tax attorneys at Rosenberg Martin Greenberg make it their mission to provide you with accurate, up-to-date information so clients in the mid-Atlantic region can have confidence in their tax situation. If you have a question about 2017 Tax Cuts and Jobs Act or its effect on your Maryland business, please contact us to speak with one of our tax attorneys.
Additional Pass-Through Taxation Resources:
- Accounting Today, Unsolved mysteries of pass-through taxation, https://www.accountingtoday.com/news/unsolved-mysteries-of-pass-through-taxation
- Congress.gov, H.R. 1 – An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018, https://www.congress.gov/bill/115th-congress/house-bill/1/text