2018 Summary of Changes to Income Tax for Corporations and Pass-Through Entities
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The following provides a summary of the changes to the income tax rules for corporations and pass-through entities (and the individuals who own pass-through entities):
Corporate Tax Rate: The maximum corporate tax rate is reduced to 21%. This change is permanent and will not sunset in 2026. The corporate alternative minimum tax is repealed.
Pass-Through Entities: The Tax Act includes substantial changes to the taxation of income from pass-through entities, such as S corporations, partnerships, and limited liability companies (LLCs). The Tax Act introduces new concepts and calculations that each owner of a pass-through entity should consider. Because the effect of these new laws is different for each individual, you should work with your legal and financial advisors to determine the specific impact on you.
Qualified Business Income: Qualified Business Income (QBI) is one of the new concepts introduced in the Tax Act. QBI is the ordinary, non-investment income of the business. It is defined as all domestic business income other than interest or dividend income, capital gains, commodities gains, foreign currency gains, and similar forms of passive income.
- QBI Deduction: The Tax Act provides a new 20% deduction for QBI for taxpayers owning a partnership, an LLC taxed as a partnership, S corporation, or sole proprietorship (found in the new Internal Revenue Code Section 199A). This deduction is available for individual taxpayers, as well as trusts and estates.
- QBI Expiration: QBI is scheduled to expire for tax years beginning after December 31, 2025.
- QBI Limitations: The Tax Act lays out a complicated set of limitations for taking advantage of this deduction, including income type and thresholds. Each taxpayer’s scenario will be different. You will want to discuss the specifics as they relate to your situation with your legal and financial advisors, but here are a couple of things to consider:
- Specified Service Businesses: The deduction is generally not available to “specified service businesses” if the taxpayer’s total income exceeds $415,000 for married filers and $207,500 for single filers. It is subject to phase outs if income exceeds $315,000 for married filers and $157,500 for single filers. Specified service businesses include 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, or any trade or business in which the principal asset is the reputation or skill of one or more of its employees. Engineers and architects are specifically carved out of this limitation and are eligible for the 20% deduction when taxable income is within the applicable thresholds.
Income Thresholds: There are several income level thresholds that result in varying application of the limitations. As a general guideline, the limitation does not apply if the taxpayer’s income is less than $315,000 for married filers and $157,500 for single filers. The limitation may apply fully if the taxpayer’s income exceeds $415,000 for married filers and $207,500 for single filers. The limitation applies proportionately if the taxable income is in between those two amounts.