PPB August 2018

A fter many years of discussing tax reform, we finally got meaningful legislation that is sure to impact every small and large business. Of course, the old adage “ be careful what you wish for ” is exactly what occurred with the Tax Cuts and Jobs Act (TCJA) legislation enacted in December 2017. Our politicians claimed the new tax reform legislation would simplify the Internal Revenue Code (IRC). The reality? It’s anything but simple. The TCJA created new code sections and modified some of the existing ones. Specifically, IRC §199A is one of the two new code sections that will have the most impact on businesses and the economy. With significant tax cuts implemented through IRC §199A, time will tell if the result will be as intended when the policy was drafted. In short, IRC §199A provides a 20 percent qualified business income deduction (QBI) to pass- through entities such as multi- member LLCs, S corporations, sole proprietorships, trusts and estates, REITs, disregarded entities, and real estate investors taxed as Schedule E on Form 1040. Most small businesses operate as pass-through entities; therefore, IRC §199A will have some impact on their business. Unlike previous years where many small business owners did little to no tax planning during the year, this is not an option under IRC §199A. This new tax policy was drafted with what I refer to as a “bubble effect” and “anti-abuse” rules. Those who wait until next year to show up at their tax professional’s office for tax preparation will miss huge tax planning opportunities and may end up paying more in taxes than necessary. While IRC §199A provides the opportunity for millions of small business owners to pay far less in taxes than before, it also creates an element of paying too much if you don’t plan properly. The law is opportunistic but also complex, because it provides tax breaks to pass-through entities with various limits depending on the filing status on your personal tax return. Because the 20 percent QBI flows through to the shareholder’s personal tax return, it’s not a tax deduction at the corporate entity level. The deduction is based on several key variables: • The filing status of a taxpayer is a key element. The anti- abuse rule is triggered at $157,500 for single taxpayers and $315,000 for married couples. Unlike in previous years when we had the marriage penalty for couples, this tax reform legislation rewards marriage. It offers a higher income limit before the anti-abuse rule is triggered and the opportunity is lost. • The type of business being operated. IRC §199A has two categories that determine the income limit for the deduction. Congress wrote the tax policy to categorize businesses as “specified service” and “non- specified service.” What’s In Your Bubble? The impact of the Tax Cuts and Jobs Act on business by Andrew G. Poulos, EA, ABA, ATP 64 | AUGUST 2018 | THINK