Major tax changes were approved by Congress in the Tax Cuts and Jobs Act (TCJA) on December 22, 2017. Along with large corporations and individual taxpayers, small businesses will be impacted.
What is probably one of the most discussed and misunderstood aspects of the Act is the 20 percent deduction on qualified business income. While there a large number of items and changes in the TCJA, this particular deduction has caused both anticipation and consternation because of the language in the law.
Defining Qualified Business Income (QBI)
This provision is new and authoritative IRS guidance is still being promulgated. Consequently, business owners should exercise some caution when projecting their anticipated 20 percent QBI deduction. As a result of this change, a new form, schedule or worksheet for taxpayers to calculate the qualified business income (QBI) deduction will be forthcoming.
According to the new changes, certain self-employed taxpayers, partners, and S corporation shareholders will use this form to claim a QBI deduction on their tax returns.
The deduction is available to certain pass-through entities such as
- Schedule C filers—sole proprietors, independent contractors, and single-member limited liability companies (LLC);
- Schedule E filers—S corporation shareholders, partners, members in multimember LLCs, real estate investors, beneficiaries of trusts and estates, owners of real estate investment trusts (REIT), and those with interests in qualified cooperatives; and
- Schedule F filers—farmers and ranchers.
And what, exactly, is qualified business income?
According to an article at The CPA Journal,
"QBI is not merely the owner’s share of net income from the business; it is the net amount of income, gain, deduction, and loss from a qualified U.S. trade or service business (including Puerto Rico). It does not include investment items, such as short-term and long-term capital gains and losses, dividends, and interest other than what’s allocable to the business. It also does not include reasonable compensation or guaranteed payments to owners. It does, however, include most REIT dividends and income from publicly traded partnerships."
The deduction will be applied before that income is reported on the business owner’s individual return and taxed at the individual rate.
The 20 percent deduction is available for qualified business owners who report their business income on their individual tax returns. This is subject to some income limitations, however, and the amount of the deduction could be limited or eliminated if these income thresholds are met or exceeded.
Additionally, Forbes.com notes that,
"...the language in the tax bill: “The committees will prevent the recharacterization of personal income into business income by wealthy individuals to avoid the top personal tax rate.” means that, inexplicably, millions of small business owners, like attorneys, accountants, and consultants – won’t qualify for the 20% deduction."
Additional guidance is expected before the 2018 tax season commences.
Hiring Your Child Can Be a Tax Saving Move
Business owners may find that hiring an older child may be a smart move this year because of changes under the Tax Cuts and Jobs Act (TCJA). Owners with a child in high school or college can generate a number of tax savings, as well as other benefits.
This can work when an owner shifts some of the business's earnings to a child in the form of wages for services performed. When done correctly, this can transfer some of the higher-taxed income into low-taxed or even tax-free income.
Some caveats in order to deduct the wages as a business expense are that the work performed must be legitimate and the child’s wages must be reasonable.
Linkcpa.com offers an example of this can work for a small business owner:
"A sole proprietor is in the 37% tax bracket. He hires his 20-year-old daughter, who’s majoring in marketing, to work as a marketing coordinator full-time during the summer. She earns $12,000 and doesn’t have any other earnings.
The father saves $4,440 (37% of $12,000) in income taxes at no tax cost to his daughter, who can use her $12,000 standard deduction (for 2018) to completely shelter her earnings. This is nearly twice as much as would have been sheltered last year, pre-TCJA, when the standard deduction was only $6,350."
In addition, the owner's family taxes will be reduced even if the child’s earnings exceed the standard deduction and IRA deduction. This is possible because the unsheltered earnings will be taxed to the child starting at a 10 percent rate instead of being taxed at the parent’s higher rate.
Your Partners For HR and Payroll Management
An updated and streamlined reporting strategy will help your organization meet its obligations, while providing accuracy and timeliness. So take time to understand the new laws and prioritize accurate record keeping. In this way, you will make compliance a sure thing.
Another key step in maintaining HR compliance and increasing your company's cost-effectiveness is to consider outsourcing. A professional agency such as Accuchex can provide much-needed help with Human Resources needs and questions.
Accuchex is a full spectrum Payroll Management Services provider offering expertise in Time Management, Insurance and Retirement issues, as well.