Since the recent signing into law of the Tax Cuts and Jobs Act on December 22, 2017, the CK team has received many inquiries about its effect on future tax burdens. According to a recent survey from HubSpot, 88.5% of small businesses don’t understand the full impact of the tax bill. It’s apparent that business owners are seeking more clarity. As your trusted business advisors, we hear you loud and clear. To help you get through this transition, we will be posting our latest insights into the effects of the new law. You can subscribe here to receive our weekly email updates.
Last week, we discussed the Qualified Business Income (QBI) deduction and provided an example of how the deduction works if your individual taxable income is under certain thresholds ($315,000 for married filing jointly taxpayers and $157,500 for all others). The computation was an easy one – 20% of qualified business income yields the QBI deduction. But what happens if your income is above those thresholds?
The QBI deduction computation depends on whether your business is a “specified service”. A “specified service trade or business” involves the performance of services in the fields of:
- Actuarial science
- Performing arts
- Professional 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 1 or more of its employees.”
Note that businesses that involve architecture, engineering, insurance, financing, leasing, or hotel/motels are excluded from the “specified service” definition.
If you are in a “specified service” business and your income is above the thresholds, the standard 20% deduction is gradually reduced over the next $100,000 (married filing jointly) or $50,000 (all others) of taxable income above the threshold. The QBI deduction is reduced to zero if you are a married taxpayer with income at or above $415,000 or a taxpayer with another filing status and income at or above $207,500.
What if I am not in a “specified service”?
The same rules do not apply if you are NOT in a “specified service” trade or business. As such, determining what is or isn’t a “specified service” will be critical. Tax professionals will need to rely on regulations to help us make that determination. Until we have such regulations, we have many of the same questions as you do regarding what is or isn’t a specified service. As the deduction will not be taken until you file your 2018 return, we are grateful for the additional time to understand these complex rules.
For those of you not in a specified service but with taxable income greater than the standard thresholds, click here. If you have any questions in the meantime, please don’t hesitate to call us at 630-953-4900.