Welcome back for the final installment in the first part of the discussions on the pass-through deduction. If you missed our intro to this topic or the great examples we provided, check out our previous blog posts to get up to speed on this complex but exciting topic.
Specified service qualified business income
For certain trades where labor is the majority of business inputs, such as health, law, accounting, actuarial sciences, performing arts, athletics, financial services, etc., these rules change slightly. For taxpayers with taxable income under the $315,000, the calculation is the same as in our previous blog post, without the W-2 limitation. For taxpayers in these trades with taxable incomes from $315,000 to $415,000 married filing joint (MFJ), the deduction is phased out using the W-2 limitation calculation from above, until they reach $415,000 of taxable income where the QBI deduction is totally phased out.
As a side note, engineers and architects are explicitly excluded from the definited of “specified service” income. For those trades, use the non-specified service QBI calculations above.
As mentioned before, the W-2 wages limitation relates to wages paid by the company – this is not the W-2 wages reported by the taxpayer as his or her own wages. This figure, along with QBI, should come to you on your Schedule K-1. How it will come to you is one of the many things that we do not yet know.
You should talk with your CPA to determine which business entity makes sense for you. For Specified Service Corporations with lots of taxable income, it may make sense to convert to a C Corporation since you may not see the benefit of the QBI deduction. Again, this blog does not constitute specific tax advice, but these are considerations business owners should be thinking about as we move towards tax reform.
For the first time we can remember, there is incentive for employees to forego their “employee” status and work as an independent contractor because of this deduction. Note, however, that the law addresses this and provides restrictions for people who perform substantive activities in the business, not just contractor jobs. As with all other things, consult your CPA on these items.
Brock R. Yates, CPA, MT