The Tax Cuts and Jobs Act, passed into law in December, included a tax-code revision known as the qualified-business-income deduction. The deduction, available for the 2018 tax year and through 2025, can benefit many small businesses structured as sole proprietorships, partnerships, S-corporations and limited-liability companies, where business profits are passed through to owners and declared as income on tax returns.
To gain insight on application of the new qualified-business-income deduction, North Bay Business Journal interviewed Joseph Kitts, partner at BPM accounting firm based in Santa Rosa, along with Nicholas Biller, tax director at the company.
Have you had a chance in the two months since the law passed to analyze the new QBI deduction?
Kitts: There haven’t been any regulations yet to clarify. People are talking about the deduction as a great benefit, determining whether a business is the right entity (structure).
The QBI deduction is a below-the-line benefit that comes after a business determines its adjusted gross income?
Kitts: That’s right. They have made that clear. It’s not a deduction that will reduce your AGI. It comes afterwards (after AGI is determined). The (tax) form will look a little different, with another line item. For each qualified business an owner may be engaged with, each is looked at separately — whether it individually qualifies with QBI. One rental (property) you might think would qualify, but your large (overall) taxable income is subjected to standards. You have to apply a wage limitation, or 25 percent of wages plus assets. But if you had fully depreciated old real estate, then you might not meet a wage standard or asset standard.
Biller: You are limited on the deduction. One person can have two or three or 10 different things — a K-1 (such as income from a partnership), a rental and a sole proprietorship. For each one, the deduction is calculated separately. The wage limitation and other items are calculated on each separate item.
The legislative intent of the deduction is to give a boost to small businesses?
The projected deficit over the next 10 years is something like $419 billion because of this one deduction. It’s huge in its anticipated benefit.
For very high earners, is the deduction limited?
Kitts: To create parity, they gave corporate structures (C-corp. tax) reduction from 35 to 21 percent. To give non-C-corp. structures a similar deduction, they have this benefit. Everyone qualifies for the deduction for income through $157,500 (for single taxpayers, and $315,000 for married couples filing jointly.) It phases out at $207,500 and $415,000. After those income levels, you may still qualify for the deduction, but you are subject to wage and asset limitations. Those may limit your ability to get it (deduction), or if you are an accountant or other professional who doesn’t get it at all.
Biller: All services (law, accounting, consulting, medicine) except architects and engineers.
Kitts: Some groups that are excluded could be changed to get within the definition.
Change an accountant to an accounting engineer?
(Laughs) Yes. You’re an accountant but you’re going to sell pencils.
Why are architects and engineers able to benefit from the deduction?
Kitts: It shows the strength of different lobby groups or interests. It doesn’t seem to be rooted in a logical or reasonable basis. Why are earnings subject to the highest rate possible, and another person’s capital gain — they didn’t do anything but hold onto some property — they get a preferential rate. Our whole system is a little odd.