Business Formation

One of the changes imposed by the Tax Cuts and Jobs Act is the creation of new Section 199A, “Qualified Business Income”.
This new code section, non-corporate taxpayers (including trusts and estates) that have Qualified Business Income (“QBI”) from a partnership, S Corporation or sole proprietorship can take a deduction of up to 20% of the QBI.

QBI is generally defined as the net amount of income, gain, deduction and loss relating to a qualified trade or business and effectively connected to the conduct of the trade or business within the United States.

If the net amount is less than zero, the amount is treated as a loss from a qualified trade or business in the succeeding tax year.

Certain types of income are specifically excluded from being treated as QBI, and thus not eligible for the deduction. Investment income along with reasonable compensation payments, guaranteed payment to a partner for services rendered and payments for services to partners not acting in their capacity as partners are not included.

The deduction is a deduction from AGI in arriving at Taxable Income. It is not an or above the line deduction.

A limitation is imposed on income from certain specified service businesses, including businesses that perform services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, investing and investment management, trading or dealing with securities and any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners.

Specifically exempt from the definition of service business are engineering and architectural services.

For pass-through income from a service business, a limitation phases in when the owner’s taxable income (from all sources) exceeds $157,500 for single taxpayers and $315,000 for married taxpayers filing joint returns and is completely phased-out when taxable income exceeds $207,500 and $415,000 respectively.

A second limitation applies based upon W-2 wages and capital of a trade or business. In general, the deduction cannot exceed the greater of 50% of the W-2 wages of the business; or the sum of 25% of the W-2 wages paid plus 2.5% of the unadjusted basis, immediately after acquisition, of all “qualified property”.

Qualified property is defined as all tangible, depreciable property held by and used by the business at the close of the year.

The limitation based on W-2 wages and capital does not apply to any passthru entity owner with taxable income that does not exceed the $157,500/$315,000 threshold. Once income exceeds this amount, the W2/Capital limitation phases in and applies fully once the taxpayer’s taxable income exceeds the $207,500/$415,000 threshold

One of the changes imposed by the Tax Cuts and Jobs Act is the creation of new Section 199A, “Qualified Business Income”.
This new code section, non-corporate taxpayers (including trusts and estates) that have Qualified Business Income (“QBI”) from a partnership, S Corporation or sole proprietorship can take a deduction of up to 20% of the QBI.

QBI is generally defined as the net amount of income, gain, deduction and loss relating to a qualified trade or business and effectively connected to the conduct of the trade or business within the United States.

If the net amount is less than zero, the amount is treated as a loss from a qualified trade or business in the succeeding tax year.

Certain types of income are specifically excluded from being treated as QBI, and thus not eligible for the deduction. Investment income along with reasonable compensation payments, guaranteed payment to a partner for services rendered and payments for services to partners not acting in their capacity as partners are not included.

The deduction is a deduction from AGI in arriving at Taxable Income. It is not an or above the line deduction.

A limitation is imposed on income from certain specified service businesses, including businesses that perform services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, investing and investment management, trading or dealing with securities and any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners.

Specifically exempt from the definition of service business are engineering and architectural services.

For pass-through income from a service business, a limitation phases in when the owner’s taxable income (from all sources) exceeds $157,500 for single taxpayers and $315,000 for married taxpayers filing joint returns and is completely phased-out when taxable income exceeds $207,500 and $415,000 respectively.

A second limitation applies based upon W-2 wages and capital of a trade or business. In general, the deduction cannot exceed the greater of 50% of the W-2 wages of the business; or the sum of 25% of the W-2 wages paid plus 2.5% of the unadjusted basis, immediately after acquisition, of all “qualified property”.

Qualified property is defined as all tangible, depreciable property held by and used by the business at the close of the year.

The limitation based on W-2 wages and capital does not apply to any passthru entity owner with taxable income that does not exceed the $157,500/$315,000 threshold. Once income exceeds this amount, the W2/Capital limitation phases in and applies fully once the taxpayer’s taxable income exceeds the $207,500/$415,000 threshold

One of the changes imposed by the Tax Cuts and Jobs Act is the creation of new Section 199A, “Qualified Business Income”.
This new code section, non-corporate taxpayers (including trusts and estates) that have Qualified Business Income (“QBI”) from a partnership, S Corporation or sole proprietorship can take a deduction of up to 20% of the QBI.

QBI is generally defined as the net amount of income, gain, deduction and loss relating to a qualified trade or business and effectively connected to the conduct of the trade or business within the United States.

If the net amount is less than zero, the amount is treated as a loss from a qualified trade or business in the succeeding tax year.

Certain types of income are specifically excluded from being treated as QBI, and thus not eligible for the deduction. Investment income along with reasonable compensation payments, guaranteed payment to a partner for services rendered and payments for services to partners not acting in their capacity as partners are not included.

The deduction is a deduction from AGI in arriving at Taxable Income. It is not an or above the line deduction.

A limitation is imposed on income from certain specified service businesses, including businesses that perform services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, investing and investment management, trading or dealing with securities and any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners.

Specifically exempt from the definition of service business are engineering and architectural services.

For pass-through income from a service business, a limitation phases in when the owner’s taxable income (from all sources) exceeds $157,500 for single taxpayers and $315,000 for married taxpayers filing joint returns and is completely phased-out when taxable income exceeds $207,500 and $415,000 respectively.

A second limitation applies based upon W-2 wages and capital of a trade or business. In general, the deduction cannot exceed the greater of 50% of the W-2 wages of the business; or the sum of 25% of the W-2 wages paid plus 2.5% of the unadjusted basis, immediately after acquisition, of all “qualified property”.

Qualified property is defined as all tangible, depreciable property held by and used by the business at the close of the year.

The limitation based on W-2 wages and capital does not apply to any passthru entity owner with taxable income that does not exceed the $157,500/$315,000 threshold. Once income exceeds this amount, the W2/Capital limitation phases in and applies fully once the taxpayer’s taxable income exceeds the $207,500/$415,000 threshold

A late election to be an S corporation generally is effective for the tax year following the tax year beginning on the date entered on line E of Form 2553. However, relief for a late election may be available if the corporation can show that the failure to file on time was due to reasonable cause.
To request relief for a late election when the tax year beginning on the date entered on line E ends on or after December 31, 2007, a corporation that meets the following requirements can explain the reasonable cause in the designated space on page 1 of Form 2553.
The corporation fails to qualify to elect to be an S corporation (see Who May Elect on page 1) solely because of the failure to timely file Form 2553.
The corporation has reasonable cause for its failure to timely file Form 2553.
The corporation has not filed a tax return for the tax year beginning on the date entered on line E of Form 2553.
The corporation files Form 2553 as an attachment to Form 1120S no later than 6 months after the due date of Form 1120S (excluding extensions) for the tax year beginning on the date entered on line E of Form 2553.
No taxpayer whose tax liability or tax return would be affected by the S corporation election (including all shareholders of the S corporation) has reported inconsistently with the S corporation election on any affected return for the tax year beginning on the date entered on line E of Form 2553.
Similar relief is available for an entity eligible to elect to be treated as a corporation (see the instructions for Form 8832) electing to be treated as a corporation as of the date entered on line E of Form 2553. For more details, see Rev. Proc. 2007-62, 2007-41 I.R.B. 786.
To request relief for a late election when the above requirements are not met, the corporation generally must request a private letter ruling and pay a user fee in accordance with Rev. Proc. 2008-1, 2008-1 I.R.B. 1 (or its successor). However, the ruling and user fee requirements may not apply if relief is available under the following revenue procedures.
If an entity eligible to elect to be treated as a corporation (a) failed to timely file Form 2553, and (b) has not elected to be treated as a corporation, see Rev. Proc. 2004-48, 2004-32 I.R.B. 172.
If a corporation failed to timely file Form 2553, see Rev. Proc. 2003-43, 2003-23 I.R.B. 998.
If Form 1120S was filed without an S corporation election and neither the corporation nor any shareholder was notified by the IRS of any problem with the S corporation status within 6 months after the return was timely filed, see Rev. Proc. 97-48, 1997-43 I.R.B. 19.

The IRS service center will notify the corporation if its election is accepted and when it will take effect. The corporation will also be notified if its election is not accepted. The corporation should generally receive a determination on its election within 60 days after it has filed Form 2553.
If box Q1 in Part II is checked, the corporation will receive a ruling letter from the IRS that either approves or denies the selected tax year. When box Q1 is checked, it will generally take an additional 90 days for the Form 2553 to be accepted.
Care should be exercised to ensure that the IRS receives the election. If the corporation is not notified of acceptance or nonacceptance of its election within 2 months of the date of filing (date faxed or mailed), or within 5 months if box Q1 is checked, take follow-up action by calling 1-800-829-4933 1-800-829-4933.
If the IRS questions whether Form 2553 was filed, an acceptable proof of filing is (a) a certified or registered mail receipt (timely postmarked) from the U.S. Postal Service, or its equivalent from a designated private delivery service (see Notice 2004-83, 2004-52 I.R.B. 1030 (or its successor)); (b) Form 2553 with an accepted stamp; (c) Form 2553 with a stamped IRS received date; or (d) an IRS letter stating that Form 2553 has been accepted.

Simply stated, an S Corporation is taxed in the same manner as a partnership and is not taxed at the federal level. The income or losses and expenses flow through to the shareholders. A "C" Corporation pays tax on its profits and when the owner shareholders take profits from the corporation, the distributions take the form of taxable dividends. In effect, this is a double taxation of profits. There are advantages and disadvantages to both S Corporations and Regular C Corporations. Speak to your local CPA about the tax strategies of selecting the type of entity for your business.

A partnership that pays premiums for health insurance for its partners has a choice. It may treat the premium as a reduction in distributions to its partners or deduct the premium as an expense and charge each partner's share as a guaranteed salary payment taxable to the partner. The partner reports the guaranteed payment as non-passive income on Schedule E and 100% of the premium as an adjustment on Form 1040 line 29.

Guaranteed salary that is fixed without regard to partnership income is taxable as ordinary wages and not as partnership earnings. As a General partner the guaranteed salary and net partnership income is subject to self-employment tax. Limited partners do not pay self-employment taxes unless guaranteed payments are received.

DBA is an acronym for "Doing Business As". It is also known as a Fictitious Name. Most states require that sole proprietorships and partnerships that are conducting business under a name other than the owner(s) must file for a DBA certificate in the county where business is conducted. The DBA certificate is generally obtained at the Clerk of Court of the county in which business will be conducted. Fees are typically between $100 and $225 and most courthouses have records that may be searched to determine if your suggested name will be unique.