Do you have a tech business that you operate as a pass-through entity? If so, Section 199A of the recent tax reform legislation may apply to you or your business. This provision introduces a 20% deduction for qualified business income. Here are the answers to 2 common questions about the new deduction which is available for taxable years 2018 through 2025.
- What generally is qualified business income?
Qualified business income is income from partnerships (entities filing Form 1065), S corporations (entities filing Form 1120S), and sole proprietorships if that income is effectively connected with a U.S. trade or business (i.e., the income must be U.S.-source income). In addition, if the business is a specified service business, a taxpayer cannot take the deduction if he or she has income in excess of $207,500 (twice that if filing a joint return), and is limited in his or her ability to take the deduction if the taxpayer has income in excess of $157,500 (twice that if filing a joint return). A specified service business includes a consulting business, so companies such as cyber security consultants have to be aware of this limitation. Qualified business income does not include investment related income, such as capital gain items or dividends.
- What if the taxpayer has more than one qualified businesses?
The qualified business income is determined for each qualified business, but the net income for each business is then combined. If a taxpayer has a net loss for one qualified business and net income for another qualified business, the net loss must be applied against the net income. If the overall result is a net loss, the net loss is carried forward and applies to reduce qualified business income in future years.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.