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How Does Tax Reform Impact You?

The Trump Administration passed an intricate and complex tax reform bill just before the close of 2017, but what will this mean as we move into 2018?

Register Now: Tax Reform Update for the Construction Industry
9/25/2018

Proposed “Pass Through” Deduction Regulations - What does It mean for My Business?
8/14/2018

More on the New Qualified Opportunity Zones – Formation and Operation of a Fund
8/9/2018

Evaluating the Use of the New York Charitable Gift Fund to Secure Tax Deductions
7/23/2018

New Jersey grapples with new tax law
7/12/2018

Is the Tax Cuts and Jobs Act (“TCJA”) Eating Law Firms Breakfasts, Lunches and Dinners?
7/11/2018

Changes Affecting Divorce in Light of the Tax Cuts and Jobs Act
6/28/2018

More on the New Qualified Opportunity Zones – Significant Tax Benefits
6/13/2018

Estate Planning Under the New Tax Law
5/31/2018

Did the Tax Cuts and Jobs Act of 2017 Increase the Value of Equity Interests?
5/22/2018

New Qualified Opportunity (Zone) Funds Offer Significant Tax Incentives for Investors
5/18/2018

Impact of the Recent Tax Reform on the Private Equity Industry
5/15/2018

New York Reacts to Federal Tax Reform
5/3/2018

Governmentʼs New Tax Law Helps Contractors Catch a Break
5/2/2018

The Pass-Through Provisions of the TCJA: The Devil is in the Details
4/26/2018

Related Examples: 

Examples for non-SSTBs

Example for SSTBs

The amount of the deduction for “qualified trades or businesses” depends largely on taxpayers’ taxable income — that is, their AGI less itemized deductions (excluding the QBI deduction). It’s most easily calculated when taxable income is under $157,500 for single filers and $315,000 for married joint filers so the wage limit doesn’t apply. For example, joint filers Jane and Michael have taxable income of $150,000, including $75,000 in QBI. They can deduct 20% of $75,000, or $15,000, from their taxable income.

Computing the deduction also is fairly straightforward when taxable income exceeds $207,500 for single filers or $415,000 for married joint filers. Let’s assume Jane and Michael have taxable income of $575,000, including $75,000 of Jane’s QBI. She pays $20,000 in wages and has $90,000 of QBP. The first option for the wage limit calculation in this situation is $10,000 (50% of $20,000), and the second option is $7,250 (25% of $20,000 + 2.5% of $90,000) — making the wage limit, and the deduction, $10,000.

What if Jane and Michael’s taxable income falls into the range between $315,000 and $415,000, where the wage limit is phasing in, with everything else remaining the same? If their taxable income is, say, $400,000, their deduction is partially capped by the wage limit. As in the immediately preceding example, the full wage limit is $10,000, but, with taxable income of $400,000, only 85% of the full limit applies:

($400,000 taxable income - $315,000 threshold)/$100,000 = 85%

When taxable income doesn’t exceed $157,500 for single filers or $315,000 for married couples filing jointly, SSTBs are treated in the same manner as qualified businesses (see first example on left) when it comes to the QBI deduction. And, if the taxable income equals or exceeds $207,500 for single filers or $415,000 for married joint filers, SSTB owners receive no QBI deduction.

It’s when taxable income falls between those thresholds that things get trickier because the QBI, W-2 wages and QBP all gradually phase out on a prorated basis over this income range. The percentage that a taxpayer can take into account is 100% less the percentage equal to the ratio of 1) the amount by which taxable income exceeds the threshold amount to 2) $50,000 for single filers or $100,000 for joint filers:

1- (taxable income – applicable threshold)/$50,000 or $100,000 = applicable percentage

For example, let’s say Jane and Michael have joint taxable income of $400,000, and Jane has an SSTB with $75,000 in QBI. She pays $20,000 in wages and owns $90,000 in QBP. Only 15% of the QBI, or $11,250, qualifies for the deduction:

1- ($400,000 - $315,000)/$100,000 = 15% × $75,000 = $11,250

The gross deduction is 20% of $11,250, or $2,250. But, because only 15% of the QBI qualifies for the deduction, the couple can take account of only 15% of wages ($3,000) and QBP ($13,500) when calculating the wage limit. Fifty percent of wages for purposes of the limit, therefore, is $1,500, and 25% of wages plus 2.5% of QBP is $1,087.50 — setting the full wage limit at the greater amount of $1,500.

As for a non-SSTB, though, the wage limit phases in gradually over this income range.

In this case, 85% of the limit applies:

($400,000 - $315,000)/$100,000 = 85%

The couple must reduce their QBI deduction by 85% of the difference between the gross deduction amount and the deduction amount if the full wage limit applied:

($2,250 - $1,500) × 85% = $637.50

As a result, their allowable deduction is $1,612.50 ($2,250 - $637.50).


Excess Business Losses: How Will This Affect You?
4/17/2018

Related Examples: 

Taxpayer

Results Under TCJA (Assuming Same Facts in 2018)

Files a 2017 Form 1040, married filing joint status, shows taxable income as -$750,000 which is solely comprised of:

  • Dividend income of $1 million
  • Net business losses (schedule E and C combined) of $1.75 million dollars

Reports $500,000 of taxable income on their 2018 form 1040 and will have an excess business loss in the current tax year of $1.25 million which is treated as an NOL in the subsequent tax year.

(Ordering with Passive Activity Loss Limitation)

Files a 2017 Form 1040, married filing joint status, shows taxable income as -$750,000 which is solely comprised of:

  • Dividend income of $1 million
  • Net Passive Activity Losses of $500,000
  • Net business losses (schedule E and C combined) of $1.75 million dollars

Reports $500,000 of taxable income on their 2018 form 1040 and will have a passive loss carryforward of $500,000 and an excess business loss in the current tax year of $1.25 million which is treated as an NOL in the subsequent tax year.

(Ordering with Disposition of Passive Activity and Free Up of Suspended Losses)

Files a 2017 Form 1040, married filing joint status, shows taxable income as -$1,250,000 which is solely comprised of:

  • Dividend income of $1 million
  • Freed up suspended Passive Activity Losses due disposition of the activity of $500,000
  • Net business losses (schedule E and C combined) of $1.75 million dollars

Reports $500,000 of taxable income on their 2018 form 1040 and as a result of ordering rules will have an excess business loss in the current tax year of $1.75 million which is treated as an NOL in the subsequent tax year.


Pre-April 17 Tax Pointers: The Quirks And Questions
4/12/2018

A 1031 Post-Tax Reform Update
4/11/2018

The Modification of the Net Operating Loss Deduction: What Does This Mean To You?
4/9/2018

Q&A with Anchin’s Marc Wieder: Tax Reform’s CRE Implications
4/2/2018

New Tax Law May Encourage Home Rentals
3/25/2018

Beware the “Kiddie” Tax
3/23/2018

Expansion of Tax Basis Limitation Rules
3/19/2018

New Tax Law Provides Potential Deferral Opportunity for Equity Compensation Granted by Privately Held Companies
3/9/2018

Repeal of Partnership Technical Termination Rules – 2017 Tax Cuts and Jobs Act
3/8/2018

Webinar Recording: A Wake Up Call - Some of the Eye-Opening and Under-Publicized Impacts of the TCJA
02/27/2018

Tax Cuts and Jobs Act Impacts 529 Plans
2/23/2018

Individual Tax Rates, Brackets and AMT under the 2017 Tax Reform Act
2/21/2018

Hellenic Professionals Host US Tax Reform Panel Discussion
2/17/2018

Individual Income Tax Deductions under the 2017 Tax Reform Act
2/16/2018

Tax Cuts and Jobs Act Substantially Limits Meals and Entertainment Deduction
2/14/2018

Webinar Recording: Tax Reform for the Architecture, Engineering and Construction Industries
2/5/2018

Tax Cuts and Jobs Act Will Greatly Impact Consumer Product Companies
2/1/2018

How New Tax Law Will Impact PR Firms
1/31/2018

Tax Cuts and Jobs Act Will Greatly Impact Food & Beverage Companies
1/22/2018

Tax Cuts and Jobs Act: Key provisions affecting Hedge Funds, Private Equity Funds and Other Investment Funds or Fund Vehicles
1/17/2018

11 New Tax Deductions and Reductions Under the New Tax Law
1/17/2018

Webinar Recording: Tax Reform Discussion - How will the Bill Affect You? Get the Answers; Not Just the Facts
1/12/2018

Tax Cuts and Jobs Act: Key provisions affecting estate planning
1/8/2018

Tax Cuts and Jobs Act Offers Favorable Tax Breaks for Real Estate Owners
1/3/2018

The Tax Cuts and Jobs Act Overrides the Tax Court Decision in Grecian Magnesite Mining While the IRS Seeks to Appeal the Same Decision
12/28/2017

Tax Bill Impacts Service Firms
12/28/2017

Tax Cuts and Jobs Act Offers Favorable Tax Breaks for Businesses
12/28/2017

The Tax Reform: NY CRE Experts Weigh In
12/27/2017

The Tax Cuts and Jobs Act Doesn’t Cut the R&D Tax Credit
12/27/2017

New Tax Law Brings Big Changes for Individual Taxpayers
12/26/2017

Tax Bill Impacts A/E/C Industries
12/22/2017

Congress passes biggest tax bill since 1986
12/21/2017

Tax Bill Released
12/18/2017

Tax Plan Moves Forward
12/14/2017

How the Senate Tax Bill Could Cost You
12/11/2017

Senate Passes Tax Bill
12/5/2017

Tax Reform Advances
11/20/2017

Tax Reform Proposals Affect Partnerships and S Corps
11/16/2017

Compare and Contrast the House and Senate Tax Bills
11/14/2017

Senate GOP Releases Tax Reform Plan
11/14/2017

Tax Proposal Update
11/13/2017

More Thoughts on Tax Reform
11/9/2017

Anchin Insights on Tax Reform
11/7/2017

House Proposal Would Change Long Term Contract Method
11/3/2017

Republicans Finally Release Tax Reform
11/2/2017

Year-End Tax Planning for Businesses: Looming Tax Reform Creates Planning Challenges
10/30/2017

Federal Tax Proposal Released
9/28/2017

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