How Business Owners Will Get 20% Business Income Deduction from the Trump Tax Reform
The IRS finally issued its guidance on the 20% business income deduction for pass-thru entities such as LLCs and S Corps. The good news is that Real Estate investors will be able to get this deduction. Accounting today posted an article as well as Forbes with an extensive detail of the regulations. Below there is a summary of the most relevant information:
- Any trade or business activity involving the performance of services (Specified Service Trade or Business) SSBT will not get the 20% deductions if the owner’s earned income is over $157,500, or $315,000 for a married couple. If they earn more than $207,500 if they’re single, or $415,000 if they’re married, the 20% deduction is phased out completely.
- SSBT comes from activities such as:
- Actuarial Science
- Performing Arts
- Financial Services
- Brokerage Services
- Any enterprise for whom the reputation or skills of one or more of its employees are the principal asset.
- Reputation, referred above, it is narrowly defined with reference to endorsements, appearance fees and more.
- Investing, trading, securities dealing, partnership interests, commodities and investment management are all included in SSTB.
- SSBT comes from activities such as:
- Architects and Engineers are excluded from SSTB and they will get 20% deduction.
- Real Estate Investors will be able to deduct 20% of their business income from LLCs and S Corps if they participate 250 active hours during the year involved with their real estate business and keep records of their activities.
- Income from originating and selling mortgages is eligible for the deduction.
- Shareholders of mutual funds with real estate investment trust investments can get the deduction.
- Individual REIT investors through mutual funds are eligible for the same 20 percent deduction as direct investors with respect to their qualified REIT dividends.
- All taxpayers who earn less than $157,500, or $315,000 for a married couple, can deduct 20 percent of the income they receive via pass-through businesses such as LLC and S Corps from their overall taxable income.
- Business Owners whose income is not SSBT who earn above $157,500, or $315,000 for a married couple must meet certain criteria to take the full deduction: how much you pay in employee wages or how much you have invested in real estate (deduction is the greater of):
- 50% of the taxpayer’s share of the W-2 wages with respect to the qualified trade or business, or
- The sum of 25% of the taxpayer’s share of the W-2 wages with respect to the qualified trade or business, plus 2.5% of the taxpayer’s share of the unadjusted basis immediately after acquisition of all qualified property.
- Then Add:
- Add 20% of qualified REIT dividends and PTP income.
- Businesses with gross receipts of less than $25 million whose SSTB income is 10% or less of the gross receipts in a disqualified service field, the service income is ignored and the entire business income is used to calculate 20% deduction.
- Businesses income aggregation is allowed if the same owner(s) directly or indirectly own 50% or more of each business to be aggregated, businesses are not SSTB and share the same tax year, under two of the three criteria below:
- Provide products, services, similar or offered together;
- Share facilities or centralized business elements, such as personnel, accounting, legal, manufacturing, purchasing, human resources, or information technology resources; or
- Operated in coordination with one or more of the businesses in the aggregated group.
We look forward to helping you get the most benefit from these tax law changes. Please contact us for more information.
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