Taxation of Pass-throughs:
Starting in 2018, business owners and self-employed are entitled to a 20% deduction of their qualified business income. These rules are complicated and amount of tax benefit depends on your income level, your occupation and if you utilize employees or capital. This could be a rather nice tax break for some and no special action is needed to claim the deduction, as Schedule C sole proprietors qualify as pass-throughs. The 20% write-off helps to offset the repealed deduction for meals and entertainment that many self-employed claim.
Calculating the 20% Deduction:
For Single Taxpayers making less than $157,500 and Married Taxpayers making $315,000, the deduction for qualified business income is a relatively straight forward 20% of profit. The deduction is available for Schedule C and S-Corporations, though the deduction would appear to be larger for sole proprietors as profit is larger as wages are paid in S-Corps. S-Corporations, usually still result in the greater tax savings due to the savings in self employment taxes.
Once you hit the income limits, your deduction becomes more complicated depending on if you operate a services business, pay wages or use property. The deduction formula changes to the lesser of 20% of profit or 50% of your W-2 Wages paid. Accordingly, you must pay wages to get the deduction. So, in this scenario it may be advisable to establish a corporation in order to pay wages to the sole LLC member/owner. If you operate a service trade business and make more than $207,000 Single or Married $415,000, your deduction is phased out completely.
Section 199A Optimization:
The new tax law changes with regard to the deduction for qualified business income are complicated and any benefit would be unique to your specific tax situation. Please contact a DC Tax Attorney to evaluate your business structure to include a estimate of what the new pass-through deduction means for you.