Ask a CPA

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

The combination of residential property taxes and Income or sales taxes is capped at $10,000.

Property taxes remain fully deductible for taxpayers in a business or for-profit activity, so taxes paid on rental realty can be taken in full on Schedule E.

For tax years beginning after December 31, 2017 and before January 1, 2026, the overall itemized deduction limitation of 3% of the excess of AGI over the threshold amount (applicable to certain itemized deductions) is suspended.

The maximum amount of age-based long-term care premiums that can be included as deductible medical expenses for 2018 (subject to the AGI floor is $420.

If you are age 40 or younger at the end of 2018; $780 for those age 41 through 50; $1,560 for those age 51 through 60; $4,160 for those age 61 through 70; and $5,200 for those over age 70.

Gambling losses remain deductible as a miscellaneous itemized deduction (not subject to the 2% limitation) to the extent of gambling winnings.
,br> The Act provides that all deductions for expenses incurred in carrying out wagering transactions, and not just gambling losses, are limited to the extent of gambling winnings.

For tax years beginning after December 31, 2016 and before January 1, 2019, medical expenses, for all taxpayers, are deductible to the extent that they exceed 7.5% of AGI.

In addition, the AMT preference related to medical expenses is eliminated.

For tax years beginning after December 31, 2017 and before January 1, 2026 all miscellaneous itemized deductions that were previously subject to a 2% AGI limitation are suspended.

Among the items included in this elimination are:
All unreimbursed employee business expenses;
Union dues
Brokerage fees
All expenses related to tax return preparation;
Appraisal fees for charitable contributions;
Investment expenses.

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

The PATH Act permanently extended the enhanced $500,000 maximum amount of expensing available (along with the $2,000,000 phase-out threshold) under §179.

Under the new law, for property placed into service in tax years beginning after December 31, 2017, the maximum amount of expensing is increased to $1,000,000, and the phase-out threshold amount is increased to $2,500,000.

For tax years after 2018 these amounts will be indexed for inflation.

100% additional first-year bonus depreciation is allowed for qualified property acquired and placed into service after September 27, 2017 and before January 1, 2023.

The new rules eliminate the requirement that the original use of the property commence with the taxpayer. As such, bonus depreciation is available for new or used property.

Taxpayers have a right to elect 50% bonus depreciation for property placed into service after September 27, 2017 during the first tax year that ends after September 27, 2017.
In the years that follow the bonus depreciation percentage will diminish. i. For property placed into service after December 31, 2022 and before January 1, 2024 bonus depreciation is 80%.
ii. For property placed into service after December 31, 2023 and before January 1, 2025 bonus depreciation is 60%.
iii. For property placed into service after December 31, 2024 and before January 1, 2026 bonus depreciation is 40%.
iv. For property placed into service after December 31, 2025 and before January 1, 2027 bonus depreciation is 20%.