Educate Featured Carousel March 2019

Pluses and Minuses of New Tax Law

Written By: Jay Hutto

The 2018 tax year is the first year that Tax Cuts and Jobs Act (TCJA) is in full effect. While the legislation simplifies tax preparation and reduces taxes for most individuals, it has complications that affect business and individual taxpayers.

Pass-Through Deduction

One change, called pass-through entities, can benefit owners of businesses. This provision allows for a 20 percent deduction of qualifying business income (QBI) for such companies, which include sole proprietorships, partnerships, S corporations and limited liability companies (LLC).

QBI doesn’t include certain investment items, reasonable compensation paid to an owner for services rendered to the business or any guaranteed payments to a partner or LLC member treated as a partner for services rendered to the partnership or LLC.

Various conditions apply to this deduction. One condition is a cap on qualifying business income to which the deduction applies. The limitation is applicable to owners with taxable income over $157,500 for someone filing individually and $315,000 for a married couple filing jointly.

Another limitation is on which type of income is eligible for the 20 percent deduction.

When the income-based limit applies to owners of pass-through entities, the QBI deduction generally can’t exceed the greater of the owner’s share of:

  • 50 percent of the amount of W-2 wages paid to employees by the qualified business during the tax year or
  • The sum of 25 percent of W-2 wages plus 2.5 percent of the cost of qualified property.

Another limitation for taxpayers subject to the income-based limit is that the QBI deduction generally isn’t available for income from some service businesses. Examples include businesses that involve investment-type services and most professional practices (other than engineering, architecture, real estate and insurance).

Despite the complexity, the potential 20 percent deduction on qualifying business income is important for you and your tax professional to consider.

Deduction Limit for Sales and Local Taxes

The new $10,000 cap on the itemized deduction for state and local taxes has a significant impact on higher-income taxpayers. The cap, which is in effect for the 2018 through the 2025 tax year, limits your entire deduction for state and local taxes, including ad-valorem property tax and either income tax or sales tax to $10,000 for a single taxpayer or couple – or $5,000 if you’re married filing separately.

Individuals generally can take an itemized deduction for either state and local income tax or state and local sales tax, whichever is greater.

Since Florida has no individual state or local income taxes, the deduction for Floridians is generally on sales taxes and property taxes. The sales tax deduction can be more valuable if you buy a major item, such as a car or boat, during the year.

Except for major purchases, you don’t have to keep receipts and track all the sales tax you actually paid during the year, but you can if you prefer. You can determine your sales tax deduction using an IRS sales
tax calculator that will base
the deduction on your income and your local sales tax rate plus the tax you actually pay
on major purchases.

Expense your Equipment and Other Purchases

Under the new tax law, for assets (except for buildings) placed in service after Sept. 27, 2017 through Dec. 31, 2022, a business can deduct 100 percent of the cost of qualified assets in the year acquired. The definition of qualified assets has been expanded to include used property and qualified film, television and live theatrical productions.

This additional first-year depreciation is available for qualified assets, which include new tangible property with a recovery period of 20 years or less (such as office furniture and equipment), off-the-shelf computer software and so on. 

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