A centerpiece provision of the Tax Cuts and Jobs Act is the new Section 199A measure that affords owners of sole proprietorships, partnerships, S corporations and trusts a 20 percent deduction on their qualified business income (QBI) beginning in tax year 2018. In general, the deduction is available to qualifying business owners with taxable income below $315,000 for joint filers and below $157,500 for other filers, with potentially limited benefit above those levels. Small businesses qualifying for the 20 percent tax deduction could see their effective marginal tax rate reduced to 29.6 percent.
Another significant change under the Tax Cuts and Jobs Act is the reduction of tax rates for C corporations to a flat 21 percent. Also, remember that C corporations are taxed twice – once on the corporate income and then on the returns to investors. These new tax law changes present tax professionals and small business owners with some in-depth tax planning opportunities to determine the best entity type, optimize qualified business income, and potentially realize substantial tax savings.
Intuit® ProConnect™ has developed the Choice of Entity Calculator to help tax professionals evaluate the type of legal entity a business should consider.
Note that the best tax strategies may include a combination of business entities to optimize the taxpayer’s tax results.
- Allows user to evaluate optimal entity type – including Schedule C/E, partnership, S corporation and C corporation – based on amounts entered
- Assists with quantitative and qualitative analysis
- Performs phase-out computations under QBI, including the wage limit and specified service trade or business limit
- Includes designation for a specified service trade or business as well as rental real estate
- Includes designation for filing status
Additional Planning Opportunities
- Generally, it’s advantageous to reduce W-2 wages to minimize self-employment taxes. However, increasing W-2 salaries to a certain level may be necessary to optimize the 20 percent deduction. Thus, converting a 1099 contractor to a W-2 employee could be beneficial.
- Depending on the QBI and taxable income levels, it might make sense to purchase a capital asset or contribute to a retirement plan in the current year or hold off until next year to help maximize the QBI deduction.
- Because of the phase-outs and threshold amounts, married taxpayers may want to compare married filing jointly versus married filing separately to see which status yields the higher benefit.
For additional resources, visit IRS Deduction for Qualified Business Income FAQs.