The corporate tax rate is reduced to a flat 21%. Repeals the corporate AMT for tax years beginning after Dec. 31, 2017. Taxpayers with average gross receipts of less than $25 million (indexed for inflation) for the prior three taxable years are permitted to use the cash method of accounting,
Taxpayers with domestic income from pass-throughs, partnerships, S corporations, or sole proprietorships can deduct up to 20% of profits. Yes, one person businesses are pass-throughs and include individuals who rent out real estate! These rules have the experts scratching their heads! This is just a basic explanation.
This 20% deduction equals the lesser of QBI or 20% of taxable income. QBI is defined as all domestic business income other than investment income. The 20% deduction reduces taxable income, not adjusted gross income, and eligible taxpayers are entitled to the deduction whether or not they itemize.
As explained below, there are limits on the 20% deduction based on W-2 income, and the 20% deduction is not available to specified services businesses. Important exceptions. Neither of these rules applies to a single taxpayer with taxable income not exceeding $157,500 ($315,000 for a joint return). Above these incomes the rules phase in and apply in full after the single taxpayer’s taxable income exceeds $227,500 or joint filer exceeds $415,000.
Limit on Deduction. The deduction cannot exceed the greater of:
(a) 50% of the W-2 wages paid with respect to the qualified trade or business, or
(b) 25% of its W-2 wages plus 2.5% of the unadjusted basis, immediately after acquisition, of all qualified property. “Qualified Property” means tangible property subject to depreciation under §167, used to produce qualified business income.
Specified Service Businesses. Taxpayers with pass-through income from specified service businesses in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, and brokerage services are not eligible for the deduction. Architects and engineers are excepted.
Example: A lawyer filing a joint return with less than $315,000 in taxable income can deduct up to 20% of QBI.
NEW RULES ON DEDUCTIONS
Entertainment expenses. The Act repeals the current rule that allows the deduction of entertainment, amusement, or recreation that are directly related to the active conduct of a trade or business. No deduction is allowed for (1) entertainment, amusement or recreation activities, (2) membership dues with respect to any club organized for business or social purposes, or (3) a facility used in connection with any of the above items. The Act allows taxpayers to continue to deduct 50% of food and beverage expenses associated with operating their trade or business.
Section 179 deduction. If you purchase depreciable equipment in 2017, you may elect to deduct it under “section 179,” including computer software and qualified real property. You may elect to expense up to $510,000 in 2017 (with a phase-out for purchases in excess of $2,030,000 in 2017;
Bonus Depreciation For property acquired and placed in service during 2017 you may deduct 50%.of its cost (less the §179 deduction as bonus depreciation.
1. Talk with your tax adviser about what business entity will be best for you taxwise. This question is way beyond the scope of this article. There are already scholarly studies, one by more than ten law professors, on how to deal with these rules.
2. If you are an employee, you can qualify as a pass-through by quitting your job and become an independent contractor. LOL. The IRS will be gunning for this.
3. Maximize your itemized deductions, since taxable income is calculated after itemized deductions.
4. If you are a banned service provider like a lawyer, don’t make too much money. With income less than $315,000 you qualify.
5. Buy equipment in 2017. Choose the best alternative: bonus depreciation, section 1709 deductions, and MACRS depreciation:
6. Buy Vehicles Weighing Over 6,000 Pounds: If you buy and pace in service a vehicle with a gross vehicle rating over 6,000 pounds it qualifies for a §179 deduction of $25,000, plus bonus depreciation on the rest, plus regular depreciation on the rest.
7. Allocate appropriate amounts of State and local taxes remain as business expenses.
8. Reexamine entertainment expenditures that are no longer deductible.