The new tax law means major changes to the rules for small businesses and pass-through entities. Today, I will give examples of the change. If you missed our intro to this topic, just click here.
Example #1 – Taxable income less than $315,000 married filing joint (MFJ)
Taxable Income: 300,000
QBI: 200,000
W-2 Wages from passthrough: 100,000
Capital Gains: 25,000
Because this taxpayer has not reached the QBI income thresholds, we look at the first test above – the lesser of:
- 20% of QBI (20% * 200,000 = 40,000)
- 20% of Taxable income, without regard to capital gains ((300,000-25,000) * 20% = 55,000)
Thus, our tax return will include another deduction for $40,000 before calculating tax using the new brackets.
Example #2 – Taxable income more than $415,000 MFJ
Taxable Income: 1,000,000
QBI: 800,000
W-2 Wages (whole company): 300,000
Capital Gains: 50,000
Qualified Business Property: 100,000
Given this taxpayer’s taxable income, we need to factor in the W-2 limitation. The QBI deduction is the lesser of:
- 20% of QBI (20% * $800,000 = $160,000)
- The greater of:
- 50% of W-2 wages paid by the company ($300,000 * 50%) = 150,000
- 25% of W-2 wages paid by the company PLUS 2.5% of qualified business property (($300,000 * 25%) + ($100,000 * 2.5%)) = 75,000 + 2,500 = 77,500
Here, the taxpayer’s QBI deduction is $150,000. It is the greater of points 2(a) and 2(b) above, and the lesser of points 1 and 2. See how these calculations can make planning a real pain? I’m sure there are many regulations and issues forthcoming – stay tuned for more updates on these calculations. Also stay tuned for Part Three tomorrow with some final thoughts on the passthrough deductions.
As always, if you have questions regarding the new rules for small businesses and passthrough entities, contact your professional tax advisor.
Brock R. Yates, CPA, MT
