Another major change, effective for 2018, allows a tax deduction for pass through businesses, under Section199A. The common name for this provision is the Qualified Business Income Deduction (QBID). What this provision essentially says, is that if you have a trade or business, up to 20% of your net profits can be a deduction for tax purposes.
For those or you with income above $315,000 for joint filing or $157,500 for other filers, there are a set of hoops and hurdles that come into play when computing the actual QBID amount. Additionally, if you deliver personal services - like accountants, lawyers, doctors and consultants - there are specific rules that apply, especially if you are above the income limits described above. Setting aside these issues, this is a very pro-business provision. It works simply like this:
If you are self-employed, and let’s say you net $50,000 in income, your deduction from income for final income tax purposes will be slightly less than $10,000 (or 20% of $50,000). It’s important to note that QBID only saves on income taxes, not self-employment taxes.
The provision applies to business interests – this has been clear from the start - whether you are self-employed, a single member LLC, involved in a multi-member LLC, partnership or S Corporation. What wasn’t clear, is how the deduction would work in regards to the investment and ownership of real estate. However, on January 18, 2019 (just in time for tax season), the IRS issued regulations that may also potentially give a 20% deduction against the profits of rental ownership. The key here is the hours that you, your employees or the contractors you hire incur in the operation of the property. The level that must be incurred is 250 hours, and you must keep a log of this time. For most folks that have one rental, the Qualified Business Income Deduction won’t apply, but if you own multiple properties, there is hope.
The key here is that you must have significant time involved (the 250 hours mentioned above) in the operation. With only one property, this will be tough. In other situations where more than one property is involved, you can aggregate your hours (which basically means making an election that you are treating all the properties that you own as one business). One limitation, however, is that you can’t aggregate commercial and residential properties together. Separate yes, but not together.
QBID is one of the more complex changes from the new tax law – we’re here to help navigate and make sure you maximize the potential benefits!