Small business owners have gotten more information about a new tax break many will get, with the IRS issuing proposed regulations that explain the deduction for qualified business income and which company owners can claim it.
Some of the new details include how to handle a spouse’s income, whether side businesses qualify, and the rules for losses in one or more businesses.
Under the new tax law, many owners can deduct 20 percent of their qualified business income, up to a ceiling that’s equal to 20 percent of their taxable income minus capital gains. Qualified business income is earned from a company operated as a sole proprietorship, partnership or S corporation. These businesses are known as pass-throughs because the company income “passes through” to owners’ 1040 forms, where it is reported to the IRS.
Business owners of any kind can get the full 20 percent deduction as long as their taxable income — which includes earnings outside their companies — is no more than $157,500 for an individual and $315,000 for a married couple filing jointly. Even if the owner’s spouse has income from outside the business — for example, being employed in a different field or industry — that income is part of the calculations to determine whether an owner can take a qualified business income deduction.
If owners’ taxable income is above the $157,500 or $315,000 threshold, they may get a partial deduction. The computations needed to determine a partial deduction are complex and affected by how much the business pays its employees and the value of some of its property.
However, owners whose companies are what’s called a specified service trade or business — for example, health providers, attorneys, accountants or consultants — have no deduction if their taxable income is more than $207,500 for an individual or $415,000 for a married couple.
The proposal also provides details about how owners and tax preparers should treat a number of situations. For example, if an owner’s business loses money, there is no deduction in the current tax year, but the owner can carry the loss forward to the next year. If an owner has multiple businesses and one or more lose money, that loss is used to offset income in the other business or businesses.
It’s possible for owners with several businesses to have qualified income from one or more but not from others. For example, if a doctor has a side business designing and manufacturing medical devices or dietary supplements, his income levels may prevent him from getting a deduction for his practice, but he might still be able to get one for his manufacturing company.
The proposed regulations will not become official until after the IRS has received comments about them and they have been published in the Federal Register, www.federalregister.gov. Meanwhile, the IRS says taxpayers can rely on the proposed regulations for guidance about the deduction.
Many owners will need to consult a tax professional to determine how large a deduction they can take. The IRS website has information about the regulations as well as frequently asked questions including some examples of how the deduction is computed at https://bit.ly/2vwgkPx.
SMALL BUSINESS IN BRIEF
• Optimism at small businesses is growing along with the economy. The Wells Fargo/Gallup Small Business Index, compiled from a survey of 604 owners, has reached 118 in the third quarter, up from 106 in the second quarter. An index measuring owners’ expectations for the future rose to 66 from 61.
Thirty-five percent of the owners said they plan to add jobs in the next 12 months, up from 31 percent.
• Retirement is the biggest reason owners are putting their companies on the block. That’s the finding of a survey of brokers who handle sales of businesses; the survey was conducted by researchers at Pepperdine University’s Graziadio School of Business and two industry groups, the International Business Brokers Association and the M&A Source.
Retirement was cited by nearly a third of owners who sold their companies for prices under $500,000. But it was the reason cited by roughly half the owners of companies with higher price tags.
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