De­duc­tion

The Times Herald (Norristown, PA) - - BUSI­NESS -

Be­fore the law was en­acted, many of these own­ers couldn’t get the more fa­vor­able tax treat­ment en­joyed by tra­di­tional cor­po­ra­tions, those known as C cor­po­ra­tions.

The new law al­lows many own­ers to deduct 20 per­cent of what’s called qual­i­fied busi­ness in­come. They can get the full de­duc­tion as long as their tax­able in­come doesn’t ex­ceed $157,500 for an in­di­vid­ual and $315,000 for a mar­ried cou­ple fil­ing jointly. But tax­able in­come in­cludes own­ers’ and spouses’ earn­ings from out­side the busi­ness — for ex­am­ple, be­ing em­ployed in a dif­fer­ent field or in­dus­try — and earn­ings from in­vest­ments.

If tax­able in­come is above the $157,500 or $315,000 thresh­old, own­ers may get a par­tial de­duc­tion. There are two crit­i­cal fac­tors that can limit the size of the break. The first in­volves the com­pany’s W-2 wages, or how much it pays em­ploy­ees, and the value of some of its prop­erty; com­plex cal­cu­la­tions go into as­sess­ing the im­pact of wages and prop­erty on the de­duc­tion.

The sec­ond fac­tor af­fects own­ers who are in what’s called a spec­i­fied ser­vice trade or busi­ness — for ex­am­ple, health providers, at­tor­neys, ac­coun­tants or con­sul­tants. They have no de­duc­tion if their tax­able in­come is more than $207,500 for an in­di­vid­ual or $415,000 for a mar­ried cou­ple.

The IRS spells out the con­di­tions for tak­ing the de­duc­tion on its web­site. Visit https://bit.ly/2RbxOtc .

More than one ac­tiv­ity or busi­ness?

Own­ers whose busi­nesses in­volve a va­ri­ety of ac­tiv­i­ties may find that in­come from some qual­ify for the de­duc­tion while oth­ers don’t, says An­gela Dot­son, a CPA with Aprio in At­lanta. An op­tometrist who treats pa­tients may not be able to claim the de­duc­tion for that work. But the same op­tometrist who also sells eye­glasses and con­tact lenses may be able to use the de­duc­tion for that in­come.

An­other ex­am­ple: A graphic de­signer who con­sults with clients but also cre­ates web­sites. “You’re con­sult­ing, but also sell­ing a prod­uct,” Ber­dahl notes.

There might be some un­pleas­ant sur­prises when own­ers in such sit­u­a­tions get to their CPA’s of­fices. The new law re­quires sep­a­rate records for the dif­fer­ent types of work.

“They might find their books may not be in good shape for tax re­form — they may not show the data CPAs will need to know,” Dot­son says. In that case, ei­ther the owner has to go back and change the books, or pay ex­tra to have their tax ad­vis­ers do the work.

Own­ers who have more than one busi­ness with em­ploy­ees may be able to ag­gre­gate, or com­bine the qual­i­fied busi­ness in­come of the com­pa­nies, and lower the im­pact of W-2 wages on the de­duc­tion, says Miguel Farra, a CPA and tax at­tor­ney with MBAF in Mi­ami. But the busi­nesses must be in a re­lated in­dus­try.

“If you are a real es­tate de­vel­oper and some­body that owns real es­tate as in­vest­ment prop­erty, you prob­a­bly can ag­gre­gate,” Farra says. But some­one who owns a clean­ing ser­vice and an auto ser­vic­ing shop wouldn’t be able to ag­gre­gate their in­come.

Ques­tions await­ing an­swers

The guide­lines the IRS is­sued in Au­gust aren’t set in stone al­though the agency said tax­pay­ers could rely on them in com­pil­ing their 2018 re­turns. The agency has is­sued pro­posed reg­u­la­tions, and tax pro­fes­sion­als have al­ready asked the IRS to clar­ify a num­ber of is­sues, in­clud­ing which ser­vice providers can claim the de­duc­tion. For ex­am­ple, the New York State Bar As­so­ci­a­tion, which asked the IRS for mul­ti­ple clar­i­fi­ca­tions, said many tax­pay­ers, in­clud­ing those who and rent a small num­ber of real es­tate prop­er­ties, may be un­cer­tain about whether the de­duc­tion ap­plies to them.

Many of Ed Reit­meyer’s clients don’t like to get ex­ten­sions of the fil­ing dead­lines for the re­turns. But the uncer­tainty about the new law is a good rea­son to get an ex­tra six months to com­plete and sub­mit re­turns, he says.

“It may be wise to do so with more clar­ity com­ing from Congress or Trea­sury,” says Reit­meyer, a CPA with Mar­cum in Philadel­phia. How­ever, he says, “with the gov­ern­ment shut­down, and the po­lit­i­cal at­mos­phere sur­round­ing tax pol­icy, it may take well into the sum­mer to gain any clar­ity at all.”

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