Donovan, Klimczak & Company CPAs

Could Your Small Business Be Eligible for a New 20 Percent Federal Tax Deduction?

The U.S. Department of the Treasury issued final regulations on a new small business tax deduction in January that Secretary Steven T. Mnuchin said “will reduce pass-through business tax rates to their lowest rate in more than 80 years.”

This is part of the new Sec. 199A Business Income Deduction, which takes effect for the 2018 tax year. For owners of sole proprietorships, partnerships, trusts and S corporations, it means a deduction of up to 20 percent of their qualified business income.

“Small and mid-size businesses are the engines of growth for the U.S. economy,” Secretary Mnuchin was quoted as saying in a press release. The deduction, he said, will drive more investment in U.S. companies and higher wages for American workers.

Who’s eligible for the 199A deduction?

The deduction is generally available for taxpayers whose 2018 taxable income falls below thresholds of $315,000 for joint filers and $157,500 for individuals. It’s generally equal to the lesser of 20 percent of the taxpayer’s qualified business income plus 20 percent of the taxpayer’s qualified real estate investment trust dividends and qualified publicly traded partnership income, or 20 percent of taxable income minus net capital gains.

The Federal government estimates between 17-40 million American business owners will be able to take advantage of this deduction. We encourage you to contact your DKC tax professional to discuss how this new regulation impacts your tax planning.

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