Written by Bill Lorimer, CPA

In the wake of the largest tax bill since the Tax Reform Act of 1986, business owners are trying to process the implications to the tax dollars owed to the IRS.

One of the most complex areas of the new legislation is a 20 percent deduction for pass-through businesses. These types of businesses are S-Corporations, sole proprietorships, partnerships and limited liabilities companies (LLC) taxed as partnerships. The deduction is based on the qualified business income of an eligible trade or business.

However, the bill adopted a number of limitations in the ability to qualify for the deduction. Code Section 199A disallows the deduction for Specified Services Businesses which is defined as

“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 where the principal asset of such trade or business is the reputation or skill of one or more of its employees”.

Architects and engineers have specifically been excluded from the definition thus eligible for the deduction.

Unfortunately, it’s never that easy when Congress gets involved! There are plenty of other limits based on your taxable income and wages paid in the company to consider before you can utilize the deduction. If there are no limitations to the deduction the maximum effective tax rate for qualified business income will be 29.6 percent.

Originally, the House version of the tax bill called for the elimination of the Historical Tax Credit (HTC) entirely. The Senate’s plan called to keep the HTC but spread the current 20 percent credit for recognized historic structures over a period of five years, a move that would have diluted the credit’s impact. The conference committee in reconciling the House and Senate bills decided to modify the transition rule. Though not the most favorable outcome, the fact that the credit survived the reform at all is a win.

For many Americans, the Tax Cuts and Jobs Act has simplified the tax filing for individuals with the reduction or elimination of various itemized deductions along with the increase of the standard deduction. Even though the seven tax brackets stayed in the bill the top bracket fell 2.9 percent to a maximum of 37%. Unfortunately, the simplification did not extent to the business filers. This makes planning with your tax advisor of high importance in 2018.

Please contact your BMSS representative if you have any questions or if you would like to discuss the new tax law and how it affects your business further.

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