At Buttonwood Financial Group, our Team remains up-to-date on changes which will affect our clients’ financial lives. As Family CFO, we work to simplify the complexity which comes with wealth. One of our areas of expertise includes working with business owners to coordinate and execute customized tax strategy to maximize savings opportunities.
The Opportunity
If you are earning income from self-employment or a pass-through entity, the 2017 Tax Cuts and Jobs act (TCJA) may be your new best friend. TCJA created the section 199A deduction, also known as the deduction for qualified business income (QBI). In short, if you earn QBI, you may now be able to significantly cut your tax bill by writing-off up to 20% of your QBI.
Qualified Business Income (QBI)
The short definition: QBI is income earned by self-employed people and owners of pass-through business entities such as: LLCs, partnerships and S corporations. These are referred to as pass-through entities because the business itself does not pay income tax. The tax responsibility is passed to the owner(s). Really, anything but a C-Corporation is typically considered a pass-through entity for tax planning purposes.
The Strategy
Review your sources of income and entity structures to make sure you’re getting the full benefit of the QBI deduction. Think about the items below:
- Do you receive (or could you) receive 1099 income instead of W-2 income, say for consulting work or commissions?
- Are you overseeing a trust or estate with QBI?
- Are you holding REIT shares or shares of publicly traded partnership? You may be able to deduct 20% of their qualified REIT dividends and qualified partnership income.
- Do you own rental real estate and actively manage the properties?
- Coordinate QBI deductions with your pre-tax and after-tax retirement plan contributions. In particular, explore the potential of a “ Mega Backdoor Roth IRA. “
- Be sure to coordinate with the many other tax savings opportunities available to pass-through entities!
Keep in mind that to qualify as QBI, the income has to be earned by a qualified trade or business. Seems obvious, but as is the case with many good tax planning opportunities; the devil is in the sometimes-not-so-clear details. In general, the term “qualified trade or business” means any trade or business other than:
- A specified service trade or business (SSTB)
- The trade or business of performing services as an employee
When considering strategies around QBI, care must be taken to know the rules and exceptions. The SSTB exception comes into play only when the taxpayer’s 2019 taxable income exceeds $321,400 for a married couple filing a joint return, or $160,700 for a single filer. Each situation is different and should be approached with careful consideration of your facts and circumstances. For our clients at Buttonwood, we coordinate further strategy review with CPAs.
Playing Catch-Up
For the IRS, the recent five-week government shutdown couldn’t have come at a worse time. According to CBS News, IRS entered the first day of tax season with 5 million pieces of unopened mail. Some experts say it could take 12-18 months for the IRS to catch up. And you thought your “hold time” was long before!
If you would like to discuss any of this in more detail, simply email Info@ButtonwoodFG.com and we would be happy to schedule a conversation!
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