The 20% Small Business Deduction – Does Your Business Qualify?

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In December of 2017, President Trump signed a tax reform bill into law. The Tax Cuts and Jobs Act generated a lot of excitement for provisions that reduced taxes and greatly increased the estate tax exemption. This new law also provided a significant benefit to small business owners – the 20% small business deduction. However, there are restrictions on which businesses qualify for this tax benefit.

How the 20% Small Business Deduction Works

This deduction may also be called a Section 199A deduction or the deduction for qualified business income. There are two important things to remember about this “between the lines” deduction:

  • It does not lower your adjusted gross income, and
  • It is not necessary to itemize the deduction to take advantage of it.

For businesses that qualify, the 20% small business deduction applies to the lesser of:

  • Your taxable income minus any capital gains, or
  • Your qualified business income.

Qualified business income consists of “domestic income from a trade or business.” Other types of income are excluded, including employee wages, capital gains, dividend, and interest income.

However, not every business will qualify for this particular tax break.

Restrictions for Use of the 20% Small Business Deduction

This deduction is available for pass-through businesses only. This includes sole proprietorships, limited liability companies, S corporations, and partnerships.

Some pass-through businesses provide professional services. For these business owners, the 20% small business deduction begins to phase out for business income over:

  • $157,500 for single people, and
  • $315,000 for joint filers.

What is interesting about this income limit is that two partners could be taxed differently despite earning the same. For example, Entrepreneurs A and B each made $120,000 from their professional services partnership. However, Entrepreneur A’s husband made $200,000 last year, also. If they file jointly, their income puts them over the limit to take the full 20% small business deduction on Entrepreneur A’s income.

Tax law – reformed or not – is complex and sometimes difficult to apply. Financial and legal advisors may offer advice on strategies to use the deduction or other methods to lower your tax burden.

Learn More About the Effect of the 20% Small Business Deduction

If you are a small business owner, you know how important it is to take advantage of every possible tax break. It’s also critical to have good business succession plans in place.

Talk to attorney John Mangan about your small business and estate planning concerns. Please call us at 772-324-9050 or use our Contact Form to set up an appointment. We help clients throughout Florida, including Stuart, Palm City, Hobe Sound, Jupiter, and Port St. Lucie.