Category Archives: Tax Topics

Qualified Business Income

individual tax prep cpe

Need Info on Qualified Business Income?

A lot of people have been asking about Qualified Business Income recently and one of our authors, Paul Winn CLU ChFc  has nicely offered us an excerpt
from his course Tax Cuts and Jobs Act -Individual Tax Preparation.

Qualified Business Income
– Excerpt from Tax Cuts and Jobs Act Course by Paul Winn

Nature of the 20% Deduction for Qualified Business Income

Section 199A of the Internal Revenue Code added a deduction as a result of the passage of The Tax Cuts and Jobs Act of 2017 of up to 20% for qualified business income derived from a qualified trade or business.

Two components comprise the deduction for which taxpayers may be eligible:

  1. A deduction of up to 20% of qualified business income from a domestic business, subject to limitations based on –
  • the type of trade or business,
  • the taxpayer’s taxable income,
  • the amount of W-2 wages paid by the trade or business, and
  • the unadjusted basis immediately after acquisition (UBIA) of qualified property held by the trade or business.; and
    1. A deduction of up to 20% of the taxpayer’s combined qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income.

The total of the qualified business income, referred to in item 1, and the REIT and PTP income in item 2 is referred to as the “combined qualified business income amount.” The deduction is generally equal to the lesser of:

  1. The combined qualified business income amount; and
  2. The taxpayer’s taxable income reduced by the taxpayer’s net capital gain.

Deduction Eligibility

Pursuant to the provision of the TCJA creating the deduction, taxpayers who may be eligible for the deduction are those who operate a business as a sole proprietor or through a pass-through entity. Accordingly, individuals, trusts and estates with qualified business income, qualified REIT dividends or qualified PTP income may qualify for the deduction. Income earned as an employee or through a C Corporation is ineligible for the deduction.

Eligibility for the pass-through deduction authorized by the TCJA does not require that the taxpayer choose to itemize tax deductions. Accordingly, eligibility for any pass-through deduction is unaffected by the taxpayer’s election to itemize deductions or take the standard deduction.

Pass-Through Deduction for Qualified Trade or Business

The TCJA, §11011, provides for a deduction of up to 20% of a pass-through business’ qualified business income. The deduction, depending upon the amount of qualified business income and other factors affecting it, may reduce the taxpayer’s income tax liability significantly. However, the “other factors” that affect the deduction include:

  • Whether the business is a qualified trade or business;
  • The taxpayer’s taxable income if the business is a specified service trade or business;
  • The amount of W-2 wages paid; and
  • The value of qualified property.

The amount of the pass-through deduction is equal to:

  1. The lesser of A or B, where:

A is 20% of the combined qualified business income; and

B is the greater of –

  • 50% of W-2 wages paid, or
  • 25% of W-2 wages paid + 2.5% of unadjusted basis of qualified property

plus

  1. 20% of the total amount of the taxpayer’s qualified REIT dividends and qualified publicly traded partnership income for the taxable year.

Thus, critical to an understanding of the pass-through deduction are the definitions of:

  • Pass-through business;
  • Qualified trade or business;
  • Qualified business income;
  • Combined qualified business income; and
  • Qualified property.

Let’s consider each of these definitions.

Click on the link to access the rest of the PDF file

Inflation Adjusted Limits and Thresholds

One of our authors, Paul Winn, recently sent me tax information.
The IRS recently sent notification of modified revisions of inflation-adjusted limits and thresholds to reflect the change in calculating inflation from the previous method to the Chained Consumer Price Index prescribed under the Tax Cuts and Jobs Act.  Here are some the changed items :

Limit

Original Inflation Adjustment

Revised Inflation Adjustment

HSA contribution limits for individuals with family HDHP coverage (other HSA limits are unaffected)$6,900$6,850
Archer MSA

Self-only coverage out-of-pocket limit

Family coverage annual deductible

(other MSA limits are unaffected)

 

$4,600

$4,600

 

$4,550

$4,550

Adoption Assistance Exclusion and Adoption Credit

Phase-out begins at MAGI of

Completely phased out at MAGI of

$13,840

$207,580

$247,580

$13,810

$207,140

$247,180

Small Business Health Care Tax Credit

Phase-out begins at average annual wages

Phased out complete at average annual wages

 

$26,700

$53,400

 

$26,600

$53,400

Estate exclusion (for federal estate taxes)$11,200,000$11,180

To check out our tax courses, click here.

Federal Estate Tax Portability Act

Federal Estate Tax Portability
Federal estate tax portability means that a surviving spouse can inherit the estate and gift tax exemption of a surviving spouse.  Simply put, a couple can pass up to $10.86 million ($5.43 million for each spouse) in 2015 without the need for a trust.
To elect portability, a federal estate tax return, Form 706, must be timely filed at the death of the first spouse.
Example:Assume that Barney and Betty have joint assets of $10 million.  Barney dies first and all the assets pass to Betty under the unlimited marital deduction.  Barney uses none of his $5.43 million exemption.
Without Portability:  Barney’s exemption goes unused and is wasted.  Upon Wilma’s death, the amount of the $10 million estate that exceeds her $5.43 exemption will be subject to federal estate tax of approximately $1.6 million ($10.00M less exemption of $5.43M=$4.57M x 35% federal estate tax rate).
With Portability:  A form 706 is properly filed to transfer Barney’s exemption to Wilma.  Upon Wilma’s death, the $10 million estate is less than her $10.86 million exemption and the estate is passed to her heirs free of any federal estate taxes, saving $1.6 million.

Repair Regulation Relief – Relief or Stomach Ache?

The IRS has revamped the tangible property regulations for the 2014 tax year.  The new procedure allows small businesses to change a method of accounting under the final tangible property regulations on a prospective basis for the first taxable year beginning on or after Jan. 1, 2014.

“Taxpayers must evaluate certain expenditures to determine whether the costs are immediately deductible repair cots or capital improvements that need to be depreciated. In addition, regulations issued at Section 1.162-3 provide new guidance on when a taxpayer can deduct costs incurred to acquire “materials and supplies.”

The IRS is waiving the requirement to complete and file a Form 3115 for small business taxpayers that choose to use this simplified procedure for 2014.

The new simplified procedure is generally available to small businesses, including sole proprietors, with assets totaling less than $10 million or average annual gross receipts totaling $10 million or less. Details are in Revenue Procedure 2015-20, posted February 13, 2015 on IRS.gov.

For a great discussion on the pros and cons and details check out this Forbes article.  Repair Regulation Relief – What Does It Really Mean? (Not as Much as you think).

IRS. gov and Forbes.com

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