The Tax Cuts and Jobs Act of 2017
Tax reform and what it means for... (click link for more information)
Tax Reform and What it Means for Your Personal Taxes
President Trump, when he was on the campaign trail, promised that he would push for tax reform legislation. On Dec, 22, 2017, he signed The Tax Cuts and Jobs Act into law, the first major tax reform in 31 years. The new law makes many changes to the tax code. Every taxpayer is impacted.
A highlight of the changes follows:
Tax rates:
Tax rates are reduced. The top rate is reduced from 39.6% to 37%. Lower rates are also reduced.
Exemptions and the child tax credit:
The deduction for personal exemptions is eliminated. An expanded child tax credit will help make up for the loss of personal exemptions for some families. The credit is increased to $2,000 (from $1,000) for qualifying children under 17. For children 17 and older and for other dependents, the credit is $500.
Standard deduction:
The new tax reform law doubles the standard deduction. The higher standard deduction ($12,000 for singles, $18,000 for heads of household, and $24,000 for married filing joint) means that fewer taxpayers will benefit from itemizing deductions.
Itemized deductions:
Itemized deductions for all state and local taxes, including property taxes, are capped at $10,000. The limit on mortgage debt for purposes of the mortgage interest deduction is reduced from $1,000,000 to $750,000 for loans made after Dec. 15, 2017. Loans made before Dec. 15, 2017 are grandfathered at the $1,000,000 debt limit. The interest on home equity borrowing is no longer deductible. The threshold for medical expense deductions is lowered to 7.5% of adjusted gross income (from 10%) for tax years 2017 and 2018. Miscellaneous itemized deductions subject to the 2% of AGI limitation are not allowed. Miscellaneous itemized deductions lost because of the new law include employee business expenses, investment adviser fees, union dues, and tax preparation fees. Personal casualty losses are not allowed unless the losses were suffered in a federally declared disaster area.
Alimony:
The new tax reform law eliminates the alimony deduction for agreements signed after Dec. 31, 2018. Alimony income is not taxable for agreements signed after Dec. 31. 2018. There is no change to the law for agreements signed before Jan. 1, 2019.
Moving expenses:
The new tax reform law eliminates the moving expense deduction and makes employer reimbursement of moving expenses taxable to the employee beginning in 2018.
AMT:
The new tax reform law temporarily increases the alternative minimum tax (AMT) exemption for tax years 2018 through 2026. The increase in the AMT exemption, as well as the elimination of major tax preference items (exemptions, state taxes above $10,000 and miscellaneous itemized deductions), means that fewer people will be subject to AMT under the new law.
Education:
The new tax reform law modifies qualified tuition programs - §529 plans. Funds in the 529 plan can now be used to pay for grades K to 12 private school tuition. The above-the-line deduction for college tuition expenses was renewed in later legislation, but only for 2017. The
American Opportunity and the Lifetime Learning credits continue to be available.
Roth IRA conversions:
The new tax reform law repeals the special rule permitting recharacterization of Roth IRA conversions. A conversion of a traditional IRA to a Roth IRA may still be advisable, but once the conversion is completed, it can’t be undone. These are just a few of the changes included in the Tax Cuts and Jobs Act. Your 2018 taxes will be affected. That’s guaranteed by the scope of the changes. The degree of impact depends on your personal situation.
Questions we can answer for you.
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Will the new tax reform law help me or hurt me?
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Is my withholding enough so that I won’t have any surprises next Apr. 15th?
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Is there anything I can do now that will make my taxes less under the new tax reform law?
Please give us a call for answers and planning suggestions.
Tax Reform and What it Means for Homeowners
President Trump, when he was on the campaign trail, promised that he would push for tax reform legislation. On Dec, 22, 2017, he signed The Tax Cuts and Jobs Act into law, the first major tax reform in 31 years. The new tax reform law makes dozens of changes to the tax code. Many homeowners will be impacted.
A highlight of the changes follows:
Property taxes:
The deduction for all state and local taxes, including property taxes, is capped at $10,000. This limit applies to homeowners and their Schedule A property taxes. It does not apply to taxes paid on business or rental property.
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What does this change mean? It can mean that you get no tax benefit for the property taxes that you pay. For example, if your state income taxes exceed the $10,000 deduction limit, your federal income taxes are not reduced by the payment of property taxes. If your state income taxes are $7,000 and your property taxes are $6,000, only $3,000 of your property taxes end up deductible on your federal tax return. You get no tax benefit for the remaining property tax payment.
Mortgage interest:
Mortgage interest continues to be deductible but the limit on debt used to purchase, construct or substantially improve your personal residence has been reduced for new mortgages. The limit on mortgage debt for purposes of the mortgage interest deduction is reduced from $1,000,000 to
$750,000 for loans made after Dec. 15, 2017. Loans made before Dec. 15, 2017, are grandfathered at the $1,000,000 debt limit. Interest on equity debt is no longer deductible. This means that the interest paid on the borrowing from the equity of your home to pay off personal debts (such as credit card debt, auto loans, or student loans) is not deductible beginning in 2018.
Second home interest continues to be deductible. But, the combined total of the acquisition debt on your first and second home cannot exceed $750,000 ($1,000,000 if the debt is incurred prior to Dec. 16, 2017.)
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What does this change mean? If your acquisition mortgage(s) is less than $750,000, the change does not affect you. If you purchased your home a few years ago and your acquisition mortgage(s) is less than $1,000,000, the change does not affect you because of the grandfathering provision. But if you are buying a new home this year, the interest you pay on a mortgage above $750,000 will not be deductible. If your borrowed from the equity of your home, this year or in a prior year, to pay off personal debt, the interest on the equity borrowing is not deductible. It was deductible in 2017.
Standard deduction:
The new tax reform law doubles the standard deduction. The higher standard deduction ($12,000 for singles, $18,000 for heads of household, and $24,000 for married filing joint) means that fewer taxpayers will benefit from itemizing deductions.
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What does this change mean? It may mean that the standard deduction is more than your itemized deductions (medical expense, state tax and property tax, mortgage interest, and charity). For example, you are married and file a joint tax return. Your standard deduction is $24,000. Your 2018 itemized deductions are $10,000 of taxes, $10,000 of mortgage interest and $2,000 of charity. Since your itemized deductions are less than $24,000, you get no tax benefit from paying any of your itemized deductions, including the property taxes and mortgage interest on your home.
Home sale:
Changes were proposed to the home sale rules. No changes were included in the final tax reform law. You may still exclude up to $250,000 ($500,000 married filing joint) of the gain on the sale of your principle residence if you have owned and occupied the home for two of the prior five years.
Questions we can help you answer.
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Will the new tax reform law help me or hurt me?
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Is my withholding enough so that I won’t have any surprises next Apr. 15th?
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If I buy a house, will I get any tax benefits?
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If I buy a bigger house, will I get any tax benefits?
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If I borrow from my home equity to remodel my house will I get to deduct the interest on the debt?
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If I borrow from my home equity to pay off student loans (or my auto or credit card loans) will I get to deduct the interest on the debt?
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Will I lose my $1 million “grandfathered” mortgage amount if I refinance my existing mortgage?
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If I refinance my first mortgage to include my prior home equity borrowing will I be able to deduct the interest on the combined debt?
Please give us a call for answers and planning suggestions.
Tax Reform and What it Means for Real Estate Investors
President Trump, when he was on the campaign trail, promised that he would push for tax reform legislation. On Dec, 22, 2017, he signed The Tax Cuts and Jobs Act into law, the first major tax reform in 31 years. The new law makes dozens of changes to the tax code. Many real estate investors will be impacted.
A highlight of the changes follows:
Tax deferred exchanges:
The tax deferred exchange rules in §1031 will only apply to real property.
Personal property, such as furnishings or other five-year or seven-year property, can no longer qualify under the tax deferred exchange rules.
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This change means that some gain will be taxable, to the extent of gain on the personal property disposition, at your otherwise tax deferred exchange. If you had a cost segregation study on your property when you acquired it, you will probably need another study when you exchange the property to determine the gain on the personal property disposition.
Bonus depreciation:
The new tax reform law temporarily increases the 50% bonus depreciation allowance to 100% for qualifying property placed in service after Sep. 27, 2017, and before Jan. 1, 2023. A phase-out of the deduction begins Jan. 1, 2023. The new law also removes the requirement that the original use of qualified property must begin with the taxpayer. Generally, property with a useful life of 20-years or less qualifies for bonus depreciation. The building itself does not qualify.
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This change means, for example, that if you want to repave your office building parking lot or replace the fencing for your apartment building, the cost may be 100% deductible in 2018 (rather than 50% in 2017). Without this provision, you must depreciate over 15 years the cost of the parking lot and fencing.
Section 179 expensing:
The new tax reform law increases the §179 expensing amount to $1 million and the investment limitation to $2.5 million and expands property that qualifies for the expensing deduction. Additional real property, such as a roof or heating and air condition system for non-residential property, can qualify for the §179 expensing. Furnishing used in residential rental property now qualifies for §179 expensing. Without this provision, you must depreciate capital items purchased for the rental. Any §179 expensing is recaptured as ordinary income, to the extent of gain, at the sale of the property.
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This change means that you may expense, subject to the limits above, the cost of a new roof on your shopping center building or a new furnace in your office building. It also means that you can use §179 expensing on appliances, carpeting, and window covering purchased for your apartment building.
Depreciation:
The new tax reform law did not change depreciation on buildings. Depreciation on a residential rental building is still calculated using a 27½-year life. Depreciation on a non-residential building is still calculated using a 39-year life.
New 20% rental income (QBI) deduction:
The new tax reform law allows non-corporate taxpayers to deduct up to 20% of domestic qualified business income from an S corporation, partnership, LLC, sole proprietorship, or farm. In some situations, net rental income can qualify for some or all of the 20% deduction. A limitation applies based on wages paid. The wage limitation doesn’t apply if your taxable income on the Form 1040 is less than $157,500 ($315,000 for a married filing joint couple.) If your taxable income is above the threshold numbers, the 20% deduction cannot exceed 50% of wages paid for the rental property, or 25% of wages paid plus 2.5% of basis of the property used in the rental. Since most rental property owners do not pay wages, but rather contract with management companies, the 2.5% of basis calculation is the most useful.
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This change means, in the most general terms, that you may be entitled to a new deduction against your net rental income. For example, you have net rental income of $40,000 from your apartment building and your taxable income is less than the $315,000 threshold for a married filing joint couple. You may qualify for a new $8,000 deduction (20% of $40,000). Instead you have $40,000 of net rental income and your taxable income is well above the threshold numbers. You pay no wages for the rental property. Your deduction will be limited to the lesser of 20% of the net rental income or 2.5% of the basis of the apartment building. If the basis of the building is $300,000, this new law deduction is $7,500.
Passive activity rules:
The passive activity rules were not changed in the new law. A rental is a passive activity and passive activity losses are limited to passive activity income. In other words, if your rental property loses money and you have no other money making passivity activities, your rental loss is suspended to the next year(s) until you either sell the property or have net income operating the rental. An exception applies to the passive activity rules for a real estate professional.
Questions we can help you answer.
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Will the new law help me or hurt me?
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Are my withholding and estimated taxes enough so that I won’t have any surprises next Apr. 15th?
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Will my rental property qualify for the new 20% deduction?
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Will I pay taxes if I do a tax deferred exchange into another rental property?
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Can I deduct the interest if I borrow from the equity in my home to buy a new rental property?
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Are the property taxes on my rental property limited to $10,000 by the new law?
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Can I deduct the cost of putting a new roof on my rental property? New appliances? A new fence?
Please call and we’ll help you with your new tax law questions.
Tax Reform and What it Means for Your Business
President Trump promised, when he was on the campaign trail, that he would push for tax reform legislation. On Dec, 22, 2017, he signed The Tax Cuts and Jobs Act into law, the first major tax reform in 31 years. The new tax reform law makes many changes to the tax code. Your business will be impacted. Tax benefits include a reduction in the corporate tax rate, increase in the bonus depreciation allowance, an increase in the §179 expensing amount and the repeal of the corporate alternative minimum tax. Owners of S corporations, partnerships, LLCs, sole proprietorships and farms are allowed a deduction of 20% of qualified business income, subject to a number of limitations.
A few highlights follow:
Corporate taxes:
Beginning in 2018, the new tax reform law reduces the C corporate tax rate to 21%, from a top rate of 35%. Corporate alternative minimum tax was repealed.
Bonus depreciation:
The new tax reform law temporarily increases the 50% bonus depreciation allowance to 100% for qualifying property placed in service after Sep. 27, 2017, and before Jan. 1, 2023. A phase-out of the deduction begins Jan. 1, 2023. The new law also removes the requirement that the original use of qualified property must begin with the taxpayer. For the first time, bonus depreciation will be allowed on the purchase of used property.
Section 179 expensing:
The new tax reform law increases the §179 expensing amount to $1 million and the investment limitation to $2.5 million. Additional real property, such as a roof on a non-residential property, can qualify for a §179 expensing deduction.
Pass-through businesses:
The new tax reform law allows non-corporate taxpayers to deduct up to 20% of domestic qualified business income from an S corporation, partnership, LLC, sole proprietorship or farm. In some situations, net rental income can qualify for some or all of the 20% deduction. Limitations apply based on wages paid or if the qualified business income is from a specified service business (like law, accounting, medical, etc.) Neither limitation applies if the taxpayer’s taxable income on his or her Form 1040 is less than $157,500 for a single person ($315,000 for a married filing joint couple.)
Listed property:
The new tax reform law increases the depreciation for passenger automobiles placed in service after Dec. 31, 2017. The maximum amount of allowable depreciation is $10,000 for the year in which the vehicle is placed in service; $16,000 for the second year; $9,600 for the third year; and $5,760 for the fourth and later years. The new law removes computers and peripheral equipment from the definition of listed property. Therefore, laptop computers, for example, are not subject to the strict substantiation requirements that apply to other listed property.
Tax deferred exchanges:
The tax deferred exchange rules in §1031 will only apply to real property. Personal property, such as autos, machines, tractors, equipment, etc. may no longer qualify under the tax deferred exchange rules.
Deductions and credits:
The entertainment deduction has been repealed. The cost of tickets to concerts, football games or the ballet is no longer deductible. The §199 domestic production activities deduction is eliminated. The new tax reform law retains the research and development credit, but will require five-year amortization of research and development expenditures. The new tax reform law creates a temporary credit for employers paying employees who are on family and medical leave.
Interest deductions:
For businesses with gross receipts in excess of $25 million, the new tax reform law caps the deduction for net interest expenses at 30% of adjusted taxable income.
Stock options:
The new tax reform law allows qualified employees of private companies to defer tax on the exercise of options for up to five years. CEOs, CFOs, highly compensated employees and 1% owners are not eligible for the deferral.
Net operating losses:
The new tax reform law limits the net operating loss deduction to 80% percent of taxable income for losses arising in tax years beginning after Dec. 31, 2017. The carryback for NOLs is eliminated, except for qualifying farm losses. NOL loss carryforwards will be indefinite subject to the percentage limitation. These are just a few of the changes included in the new tax reform law. Your 2018 business taxes will be affected. That’s guaranteed by the scope of the changes.
Questions we can help you answer.
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Will my taxes increase or decrease because of the new tax reform law?
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Are my withholding and estimated tax payments correct considering the new tax reform law?
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Will I qualify for the new 20% business income deduction?
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Is this the year to buy additional equipment or a new vehicle for my business?
Please call our office and we can look at your particular business and its tax planning needs.
Is My Federal Withholding Right for 2018?
Tax reform legislation passed in late December reduced tax rates, eliminated the deduction for personal exemptions and eliminated or reduced several itemized deductions for tax years 2018 through 2025. Because of these changes, the IRS updated its withholding tax charts, resulting in less withholding for 2018. The reduced withholding may not be sufficient to cover your taxes for 2018. Your withholding must be reviewed. You can check to see if you will have enough federal tax withheld by using the IRS updated Withholding Calculator and Form W-4. The IRS calculator helps you review your withholding considering the new tax law.
Go to: https://www.irs.gov/individuals/irs-withholding-calculator. You will have to scroll down a bit until you see:
Tips for Using the Withholding Calculator
The Withholding Calculator asks taxpayers to estimate their 2018 income and other items that affect their taxes, including the number of children claimed for the Child Tax Credit, Earned Income Tax Credit and other items.
Take a few minutes and plan ahead to make using the calculator as easy as possible. Here are some tips:
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Gather your most recent pay stub from work. Check to make sure it reflects the amount of Federal income tax that you have had withheld so far in 2018.
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Have a completed copy of your 2017 tax return handy. Information on that return can help you estimate income and other items for 2018. However, note that the new tax law made significant changes to itemized deductions.
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Keep in mind the Withholding Calculator results are only as accurate as the information entered. If your circumstances change during the year, come back to the calculator to make sure your withholding is still correct.
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The Withholding Calculator does not request personally-identifiable information such as name, Social Security number, address or bank account numbers. The IRS does not save or record the information entered on the calculator. As always, watch out for tax scams, especially via email or phone calls and be especially alert to cybercriminals impersonating the IRS. The IRS does not send emails related to the calculator or the information entered.
Use the results from the Withholding Calculator to determine if you should complete a new Form W-4 and, if so, what information to put on a new Form W-4. There is no need to complete the worksheets that accompany Form W-4 if the calculator is used.
As a general rule, the fewer withholding allowances you enter on the Form W-4 the higher your tax withholding will be. Entering "0" or "1" on line 5 of the W-4 means more tax will be withheld.
Entering a bigger number means less tax withholding, resulting in a smaller tax refund or potentially a tax bill or penalty.
If you complete a new Form W-4, you should submit it to your employer as soon as possible. With withholding occurring throughout the year, it's better to take this step early on.
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Form W-4 for 2018 can be found at: https://www.irs.gov/pub/irs-pdf/fw4.pdf
To Change Your Withholding
Use your results from the Withholding Calculator to help you complete a new Form W-4, Employee's Withholding Allowance Certificate, and submit the completed Form to your employer as soon as possible. Withholding takes place throughout the year, so it's better to take this step as soon as possible.
We Are Happy to Help
If we can help with a projection of your 2018 taxes, updated for the new law, and help with a new W-4 withholding tax calculation, please call our office.
Special Note for 2019
If you change your withholding for 2018, please remember to recheck your withholding at the start of 2019. This is especially important if you reduce your withholding sometime during 2018. Amid-year withholding change in 2018 may have a different full-year impact in 2019. So, if you do not file a new Form W-4 for 2019, your withholding might be higher or lower than you intend.
Can I claim the new 20% qualified business income deduction on my tax return?
President Trump promised, when he was on the campaign trail, that he would push for tax reform legislation. On Dec, 22, 2017, he signed The Tax Cuts and Jobs Act into law, the first major tax reform in 31 years. The new tax reform law allows owners of S corporations, partnerships, LLCs, sole proprietorships and farms a new 20% deduction against their qualified business income, subject to a number of limitations.
A few highlights of the new provision, technically called the Section 199A deduction, follow:
Beginning in 2018, individual taxpayers may deduct up to 20% of domestic qualified business income from your S corporation, partnership, LLC, sole proprietorship or farm. In some situations, net rental income may qualify for some or all of the 20% deduction. Limitations apply based on wages paid or if the qualified business income is from a specified service business (like law, accounting, medical, etc.)
Qualified business income:
Qualified business income is the net income of your Schedule C, S corporation, partnership, LLC, sole proprietor, partnership, farm and rental property. These are often referred to as “pass-through income,” only meaning that the income from these various business structures is reported on your individual tax return. Capital gains from the sale of a business asset are not included. Interest and dividend income on business accounts is not included. If you have a sole proprietorship that makes money and an LLC that loses money, the two are netted on your individual return in calculating the 20% deduction. If these two businesses are a net loss, the loss carries over to the next year and reduces qualified business income in that year.
Taxable income threshold:
The wage and specified personal service business limitations do not apply if your Form 1040 taxable income is less than $157,500 ($315,000 for a married filing joint couple.) The deduction phases out for taxable income between $157,500 and $207,500 (between $315,000 and $415,000 for a married filing joint couple.)
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What does this mean? - If your net schedule C income or the K-1 income from your business operating as an S-Corporation or LLC is $100,000 and you’re single with taxable income below $157,500, you can qualify for a new $20,000 deduction.
Wage limitation — general:
If taxable income exceeds the threshold numbers, the 20% deduction cannot exceed 50% of the W-2 wages of the business.
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What does this mean? - If your net schedule C income or the K-1 income from your business operating as an S corporation or LLC is $500,000 and your taxable income exceeds the thresholds, your company must pay wages to qualify for the new 20% deduction (with one exception.) If your company pays $150,000 of wages, instead of a $100,000 deduction (20% of $500,000) , you are limited to a $75,000 deduction (50% of $150,000 wage).
Wage limitation — capital intensive business and rental property:
If taxable income exceeds the threshold numbers, the 20% deduction cannot exceed 50% of the W-2 wages of the business OR 25% of wages plus 2.5% of the unadjusted basis of depreciable assets used in the business.
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What does this mean? - Your net schedule C income or the K-1 income from your business operating as an S corporation or LLC is $500,000 and your taxable income exceeds the thresholds. Your business pays no wages. Because the business doesn’t pay wages, you don’t qualifying for the 20% deduction except for this next rule. Your business uses machinery and trucks with an unadjusted basis of $300,000. While you don’t qualify for the $100,000 deduction (20% of $500,000 net business income), you do qualify for a $7,500 deduction based on 2.5% of the $300,000 of equipment the business uses.
The reduced deduction doesn’t look very good in the example above but see how the limitation works on rental property. Your net rental income is $100,000 and your taxable income exceeds the threshold. Your property is managed and, thus, you pay no wages for the rental property. Because you pay no wages, your $20,000 deduction (20% of the $100,000 net rental income) is limited to 2.5% of the unadjusted basis of the rental property (not including land). If the unadjusted basis of the rental property is $700,000, you qualify to claim a $17,500 deduction against your rental income.
Specified service business limitation:
If taxable income exceeds the threshold numbers, and your business income is from a specified service business, you do not qualify for the new 20% deduction. A specified service business is any trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, including investing and investment management, trading, or dealing in securities, partnership interests, or commodities. Specified service businesses also include any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees. This provision is not defined in the new tax reform law. The IRS will be responsible for providing definitions and examples.
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What does this mean? - You report net schedule C income or the K-1 income from your specified service business (you are a doctor, lawyer, broker, consultant, actor or athlete, for example) operating as an S corporation or an LLC on your Form 1040. If your taxable income exceeds the thresholds, you are not entitled to the new 20% business income deduction, as your income is not “qualified”.
This is the briefest explanation of the most complicated part of the new tax reform law.
Please call our office for advice regarding your specific business and your personal tax situation.