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Qualified Business Income Deduction Raises Important Considerations for Business Owners

As tax season continues, getting educated on new deductions is an important component for businesses.

Block Advisors

Tax reform represents the largest change to the tax code in 30 years, and impacts virtually everybody—including business owners both small and large, who are still working to untangle the qualified business income deduction.

The new deduction is one of the biggest complexities in the Tax Cuts and Jobs Act and as tax season continues, it affords great learning opportunities for businesspeople of all sorts.

Generally, the 20 percent deduction means an eligible business owner with $50,000 in qualified business income could deduct up to $10,000. This generous tax benefit is meant to level the playing field between businesses filing as C corporations, which have a 21-percent tax rate, and small businesses paying individual tax rates ranging from 10 to 37 percent. But ever since the law passed more than a year ago, the question has been who exactly qualifies for the deduction and how it – and its limitations – are calculated.

Unpacking the consequences of the new deduction are possible. As the IRS released additional guidance, the country's tax pros are working late nights to arm taxpayers with all the information they could need.

Tax Advisor Ramon Vasquez with Block Advisors said taxpayers could be eligible for the qualified business income deduction if they have income from S corporations, LLCs, partnerships, trusts and estates; are sole proprietors filing Schedule C; or are non-corporate farms filing schedule F.

Vasquez said one of the most important to things to note about the new deduction is how many different types of business could potentially benefit.

"The qualified business income deduction also is referred to as the pass-through deduction, which is a bit of a misnomer because it isn't limited to pass-through entities. All kinds of businesses – and people – can qualify. It could be someone running a small firm with dozens of employees or it could be someone driving for Uber or running an online sales business on Etsy," Vasquez said. "But there are some situations that could be complicated, such as the treatment of some kinds of rental income."

And while the new deduction generally allows some small business owners to deduct 20 percent of their qualified business income on their personal tax return, it's also useful to know what it doesn't allow.

In addition to knowing the limitations for certain types of businesses and for taxpayers with higher incomes, taxpayers should know the qualified business income deduction does not affect the taxpayer's adjusted gross income or self-employment tax due calculation. The deduction is limited for taxpayers with taxable income of more than $157,500 for single filers and more than $315,000 for married couples filing jointly.

Though the change to the tax code presents a lot to learn, one thing will always remain certain: every tax situation is unique, and there's no shame in asking for help – especially when the stakes are this high. Block Advisors' personalized expertise provides clients with their very best tax result every year.

To find an advisor or make an appointment go to blockadvisors.com.

Ramon Vasquez is a master tax advisor for Block Advisors, which provides year-round tax prep and planning. Ramon has been providing expert tax advice and preparation support for taxpayers in Phoenix for more than 12 years.

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