Issue link: http://palletcentral.uberflip.com/i/1040159
palletcentral.com PalletCentral • September-October 2018 31 she also has nonbusiness income of $50,000. The S corporation reports W-2 wages of $300,000 (including her own wages) and has $1 million UBIA of qualified property. The qualified business income deduction in this example is $120,000, which is the lesser of (1) $600,000 times 20%, or (2) the greater of (a) 50% of W-2 wages (50% of $300,000 [$150,000]) or (b) 25% of W-2 wages ($75,000), plus 2.5% of the unadjusted basis of qualified property (2.5% of $1 million, or $25,000) [$100,000]). It's noteworthy that this owner who is ordinarily in the highest tax bracket of 37% pays an effective tax rate of 29.6% on QBI. For specified service trades or businesses (SSTBs), such as doctors, attorneys, accountants, and consultants, there is an additional limitation. This limitation means those with taxable income over $415,000 for joint filers or $207,500 for other filers get no qualified business income deduction. But because manufacturers, retailers, and wholesalers are not SSTBs, the limitation is not discussed further here. Again, this is a very brief discussion of a very complicated but valuable new deduction. Here are some points to note: • You don't have to expend any money to claim the deduction; you get it if you qualify for it. • The deduction cannot exceed your taxable income in excess of your capital gains. • QBI is essentially your share of business income, but it doesn't include capital gains and losses (including Section 1231 gains), dividends and interest income, and salaries paid to an S corporation owner-employee as well as guaranteed payments to partners or LLC members. • W-2 wages include taxable compensation (including amounts paid to an S corporation owner-employee), elective deferrals, and certain deferred compensation. • UBIA is basically the cost of property when it's placed in service. What You Can (and Can't) Deduct Tax reform has liberalized some business write-offs while eliminating others. Expanded write-offs apply for: • Buying equipment. You can elect to expense the cost of equipment purchases up to $1 million or claim a 100% bonus depreciation deduction (or even both for the same equipment if more than $1 million). This is so even if you finance the purchase in whole or in part. • Buying business vehicles. If you buy a car, truck, or van for business, the former dollar limits on depreciating the cost have been greatly liberalized. If you buy an SUV weighing more than 6,000 pounds, you can write off the full purchase price immediately. Some Deductions Have Been Eliminated • Domestic production activities deduction. The 9% deduction that has been allowed for businesses producing products domestically has been entirely eliminated. • Entertainment costs. The cost of taking a customer or vendor to a ball game or the theater is not deductible. • Employee transportation benefits. If you offer free parking or monthly transit passes to your staff, they can receive the iStockphoto.com/guirong hao The key aspect of tax reform by Congress and the President is the lowering of tax rates. How this impacts you depends on the entity used to run your business.