Good news for partnerships and S corporations (pass-throughs) which can deduct up to 20% of their Qualified Business Income (QBI) under new IRS Section 199(A).

What is Qualified Business Income?  Qualified Business Income is net income that is received from a Qualified Trade or Business. Capital gains, and dividend and interest income are not considered business income. Guaranteed payments or wages paid to owners are excluded.

What is a Qualified Trade or Business? A Qualified Trade or Business is any business that is not a Specified Service Business which is defined as a business in the fields of health, law, accounting, financial services and other consulting services.

Income Limitation for Specified Service Trade or Businesses Owners of a Specified Service Trade or Business may take the QBI Deduction if their taxable income is below $157,500 for single filers ($315,000 for Married Filing Joint) to be eligible for the full deduction.

How is the QBI Deduction Calculated? The QBI Deduction usually is the smaller of 20% of Qualified Business Income or 20% of taxable income. For example, a staffing owner of an S-corporation has $400,000 of QBI. His taxable income is $300,000, (below the income limitation). Therefore, his QBI deduction is $60,000, which is 20% of his taxable income.

Good news for staffing firms and real estate investors! The IRS clarified that staffing firms and the rental of property to a related business are Qualified Businesses for the QBI deduction with no income limitation. Other rental real estate properties may also qualify if the activity rises to the level of a business.

Limitations for Qualified Businesses – Staffing firms and rental businesses have no income limitations but may be limited based on the business’s W-2 wages and unadjusted basis in qualified property. The amount of the tax deduction will vary depending on the specific taxpayer circumstances.

Want to maximize your deduction? Regardless of your income level, there are numerous tax moves staffing owners can do to maximize this new Sec 199(A) deduction- even for 2018!

BY: Pamela Avraham, CPA, Partner, Urbach & Avraham, CPAs which provides accounting and tax services to staffing agencies. Pamela may be reached at 732-777-1158 or pma@ua-cpas.com Firm website is www.ua-cpas.com

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