If you’re currently working as an independent professional, here are three things you should know about the new law.
Section 199A is a new portion of the tax code that provides a tax benefit for pass-through entities, meaning businesses where profits are passed through from your business to your personal income tax return.
The tax law changes mean that many independents may be able to deduct up to 20% of their qualified business income. This is known as the net passive income from your business.
The potential deduction for most independents is equal to the LESSER of:
When it comes to calculating your deduction, there some important details to understand.
The 20% deduction does not apply to specified service trades—a trade or business where the principal asset of the business is the reputation or skill of one or more of its employees or owners. Some examples of service trade industries include health, law, consulting, and financial services.
However, there is an exception. If your pass-through income is below a certain threshold—less than $157,500 or $315,000 if filing jointly—any trade may take advantage of the deduction.
Further direction is still needed in order to clarify specifics for the new tax law. The IRS is expected to issue new guidance this summer which should tell you how all of this will work.
In the meantime, we recommend consulting your legal or accounting professional before making any changes to your current practices.
Please note that the following content from MBO Partners® does not constitute legal or financial advice.