One feature of the new Tax Cuts and Jobs Act is a brand-new 20% deduction for qualified business income.
The tax break is available to owners of “pass-through” entities, including sole proprietorships, S-corporations and partnerships.
It isn’t available to everyone: Entrepreneurs with taxable income under $157,500 if single or $315,000 if married may take the deduction regardless of what industry they’re in.
Over that threshold, the IRS begins to apply limits.
For instance, “specified service trades or businesses,” including doctors, lawyers and accountants, aren’t able to take the deduction at all if their taxable income exceeds $207,500 if single or $415,000 if married.
The rules are different for businesses that aren’t “specified service trades or businesses.”
Those business owners get a reduced deduction if their taxable income exceeds the $157,500/$315,000 threshold and is still under the $207,500/$415,000 threshold.
If your company is not a “specified service trade or business” and your taxable income is over the $207,500/$415,000 threshold, your deduction is generally capped as a percentage of W-2 wages paid to your employees.
Warren, who listed business income from writing on their Schedule C, generated $324,687 in qualified business income in 2018.
But she was unable to nab the 20% pass-through deduction for last year.
“Basically, once your income exceeds a certain threshold, the deduction is capped based on the wages you paid employees in your business and the business’s assets,” said Steffen.
“Because of the wage and asset test, she doesn’t get the deduction,” he said.