Insights: Article

Tax Reform: Practical Insights

August 20, 2018

The “Pass-Through” Deduction Doesn’t Require a Pass-Through
The “Qualified Business Income” deduction, a new tax break for certain businesses, allows qualifying individuals and trusts to potentially deduct up to 20 percent of their net business income from taxable income.

Recent tax reform legislation reduced the top corporation tax rate from 35 percent to 21 percent. That corporate reduction prompted “pass-through” businesses to lobby for their own tax break. The QBI deduction was the result, which prompted many taxpayers to refer to it as the “Pass-Through Deduction

Unfortunately, that nickname has led many taxpayers to believe the QBI deduction is only available if the income is earned by a “pass-through entity,” such as an S corporation, partnership or LLC. But, that’s wrong. While there are limitations related to business type and amounts earned, most business income reported on a Schedule C, Schedule E or Schedule F is potentially eligible for the deduction; it doesn’t need to arise in a pass-through entity nor be reported on a Form K-1.

There may be a lot of good business reasons to use a pass-through entity, but being eligible to benefit from a QBI deduction (or the “Pass-Through Deduction” for some) isn’t necessarily one of them. Contact your Eide Bailly tax professional to find out what you really need to know and do in order to qualify for this valuable deduction.

Tax Reform Benefits Gig Economy, Too
Many participants in the "gig economy" can look forward to good news when they file their 2018 taxes, thanks to tax reform.

A “gig,” long used to identify the work of freelancers such as musicians and others working in a similar environment, has evolved to include taxpayers who make a living, or maybe just some extra cash, working for themselves in "sharing economy" businesses such as Uber or Lyft. These taxpayers do their work as Form 1099 independent contractors, rather than as W-2 employees.

The Tax Cuts and Jobs Act, through the qualified business income deduction, provides the opportunity for many in the gig economy to exclude 20 percent of their net gig income from tax.

There are limits to this tax deduction benefit, including the exclusion of certain service type businesses that could match some of the gig economy services. However, if a taxpayer with gig net income has a taxable income level below the phaseout amounts, even an excluded service type will qualify for the 20 percent deduction benefit. The phaseout starts at $157,500 of taxable income for single filers and $315,000 for joint filers, and completely phases out at $207,500 of taxable income for single filers and $415,000 for joint filers. After those levels, while the benefit opportunity still exists, it’s probably difficult for a gig-styled business to qualify. But, it would seem, these limits are generous enough to help a lot of gig economy workers.

Gotta gig? Contact your Eide Bailly tax professional to learn more about reducing your taxes to increase your cash flow.

Take Me Out to The Ball Game — Nondeductible!

Tell me it’s not so, Joe. A customer entertainment event, like a trip to the ballpark to discuss business in a relaxed environment, is a long and storied business tradition. The ballpark’s still open, but the tickets to events that are considered customer entertainment are no longer deductible beginning in 2018. Recent tax reform legislation eliminated the deduction for business entertainment expense.

What is “entertainment?” IRS Publication 463 gives a good summary:

Entertainment includes any activity generally considered to provide entertainment, amusement, or recreation. Examples include entertaining guests at nightclubs; at social, athletic, and sporting clubs; at theaters; at sporting events; on yachts; or on hunting, fishing, vacation, and similar trips.

Although new law guidance questions remain to be answered by the Internal Revenue Service, it’s important to understand and plan for deductions that are no longer available in relation to meals and entertainment. Perhaps the real focus, however, should be on a change of operational activities rather than just on the loss of deduction. Implementing such a change can effectively maintain client relationships and service expectations while still enabling some part of that cost to be deductible.

Contact your Eide Bailly professional to learn more about the new meal and entertainment expensing rules; we can outline how they could affect your client relationship activities and provide ideas on how to deal with the changes.

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