7 ms·

Pass-Thru Income Deduction

88 points by ljoshua 9y ago

cornellwright 9y ago
One of the worst things about the current tax code (and soon-to-be new tax law) is the cost of compliance. You can argue about high tax or low tax and who should pay more than whom, but cost and time to comply does not create any value and is an artificial way that we make our country less competitive. This article is a clear example of that, laying out 10 different things you need to know with complicated formulas for deduction and professions that do and do not get benefits. What a mess.
- maxxxxx 9y ago
  Congress is full of lawyers who assume that everyone has access to lawyers. That's why everything is so complex. In reality the big guys have lawyers on retainer and can handle the laws and the little guy is at a disadvantage. The same happens in a lot of companies. IT develops rules for IT people and the regular user is screwed.
  - emodendroket 9y ago
    > Congress is full of lawyers who assume that everyone has access to lawyers. That's why everything is so complex. In reality the big guys have lawyers on retainer and can handle the laws and the little guy is at a disadvantage. Generally these changes have some sort of champion requesting them and don't just arise from the ether. I'm not sure we can explain it all away as Congress not realizing that their decisions will advantage large business interests at the expense of smaller ones, particularly when the beneficiaries are also sponsors.
- joelrunyon 9y ago
  This. I think I would be willing to pay a higher total flat tax if it was just simpler. Right now, I spend a few thousand/year and an annoying amount of time to make sure I'm doing it right.
  - munk-a 9y ago
    I think everyone* wants this, and this is how it works in Sweden where most people get mailed a pre-filled tax form and just have to vet the information and direct the refund/pay the bill. In the US there is a not small industry of tax preparers that exists solely due to the complexity of our tax code. The complexity is there to keep H&R Block, TurboTax etc... in business by encouraging middle/low income people to keep returning to them every year. I am amazed at how far from the stated goal of "We want you to do your taxes on an index card" this bill is going to come out as... and saddened that the majority of voters supporting the GOP won't feel fleeced by it. *(with the exception of those preparers that very much want to keep the complexity and rich people/large businesses that can exploit loopholes effectively)
    - joelrunyon 9y ago
      I'm not sure people will feel "fleeced" since most people (~80%) are getting a tax cut - https://www.washingtonpost.com/graphics/2017/business/tax-bill-calculator/?utm_term=.38d3832f7d71 https://www.washingtonpost.com/graphics/2017/business/tax-bi...
      - curun1r 9y ago
        They'll only feel fleeced when the follow-up cuts to Social Security and Medicare get felt. Republicans have been very careful to say that only the benefits of current recipients of those programs won't see cuts. The rest of us who aren't yet retired will take a pretty huge hit in retirement. That's where we're being fleeced. Perhaps the people who look at a tax return as free money from the government won't feel fleeced, but anyone who understands the concept of saving for retirement should be able to put together that we're having our tax burden lessened by $1k-$2k per year and, in exchange, needing to almost entirely fend for ourselves in retirement.
        joelrunyon 9y ago
        > Perhaps the people who look at a tax return as free money from the government won't feel fleeced It's not a tax return, it's a tax cut. That means the government is taking less money from me (not giving me more money). I don't know anyone under 35 that's actually counting on SS on being there for them (not saying they're happy about, but most realized 10+ years ago that it's not gonna happen). That was a reality before this happened.
- jfaucett 9y ago
  completely agree with this sentiment. I've often wished a test city/state would be allowed to just do a flat tax and completely remove all tax code and see what happens. Obviously the convolutedness is a barrier to entry to small startups and a unfair advantage for established market entities. Also I'd love to see an experiment on a zero tax law that basically amounted to no taxes unless the business/person earned a net profit of something deemed reasonable (say 30-50k in a modern society). Why our societies constantly try to suffocate individuals trying to innovate and create value for his fellow members of society is beyond me.
  - techsupporter 9y ago
    > I've often wished a test city/state would be allowed to just do a flat tax I don't want a flat tax (as in "all income taxed at 15%," let's say) because a flat tax has an unfair impact on people at lower income levels. But, otherwise, I agree with your entire post. Here's my ideal law, with the caveat that I have zero legal training beyond six seasons of Law and Order and four seasons of Suits: (1) The following marginal rates are established: (Emphasis here: these numbers are made up for demonstration purposes only.) - $0 through $13,000: 0% - $13,001 through $25,000: 5% - $25,001 through $46,000: 8% - and so on (2) All money earned, by whatever means and from whatever source, by a person or legal entity resident in the United States shall be subject to the tax specified above. (3) The Internal Revenue Service shall, no later than the 15th of April of each calendar year (or the next day following the business day after the 15th of April if the 15th of April falls on a Saturday, Sunday, or federal holiday), prepare and mail to each holder of an EIN, each person for whom any tax or income declaration form (such as W2, 1098, 1099, and similar) has been submitted to the IRS, a statement of what the IRS believes the taxpayer owes or is due as a refund. (4) If the IRS has notified the taxpayer that the IRS believes the taxpayer is due a refund, the taxpayer may notify the IRS of a financial account located inside the United States into which such refund shall be deposited or may request a paper check for such refund or, under such rules as the Secretary shall provide, make a request for United States Savings Bonds. Any request must be made within five years of the date the taxpayer knew or reasonably should have known that the refund was due, otherwise the refund is the property of the Treasury absent a showing of exigence. (5) If the IRS has notified the taxpayer that the IRS believes the taxpayer owes additional taxes, the taxpayer shall make payment to the IRS no later than the 15th of July following receipt of said notice (or the next day following the business day after the 15th of July if the 15th of July falls on a Saturday, Sunday, or federal holiday) by providing the IRS with debit instructions for a financial account located inside the United States or via a paper check or other form of transfer of dollars. (6) In the case that the taxpayer disagrees with a notice provided by the IRS under paragraphs 5 or 6, the taxpayer shall, no later than the 15th of July following receipt of said notice (or the next day following the business day after the 15th of July if the 15th of July falls on a Saturday, Sunday, or federal holiday), file the tax forms designated by the IRS under such rules as the Secretary shall provide, to indicate what the taxpayer believes is the proper tax due or refund owed. If the taxpayer still owes additional tax, the tax payment shall be due at the time of filing. The IRS shall have 120 days to respond, otherwise the taxpayer's submission is deemed valid and binding upon the IRS. (7) There is no paragraph seven.
perseusprime11 9y ago
Should everyone be thinking of becoming a pass through business? Person Inc. works for Big Business Inc. Everybody pays 20% tax and we are all happy.
- o_nate 9y ago
  This handy guide lays out some ways that the legislators in their wisdom have sought to curb this understandable impulse. E.g. the allowable deduction is proportional to regular wages paid by the pass-thru business. So you can only take deductions on income of Person Inc if Person Inc also pays wages that are taxed at regular rates. Provisions like that will keep the tax accountants busy.
  - Bedon292 9y ago
    I believe you are addressing #8 on the link. This only applies to high income earners. So if you are under those thresholds you don't need to pay any additional employees.
- nodejsbangalore 9y ago
  I might be wrong but I think that tax rate is not 20%. I think the deduction is 20%. If I understand it correctly then what it means is that if you have earned $100k then you are taxed only on $80k and 20% (20K in this case) is your deduction. Can someone confirm/deny it.
  - jermaustin1 9y ago
    90% confirm. If your company earned $100k, and paid you $50k, you can deduct 20% of the 100k capped at 20% of your ordinary income ($50k), for a total deduction of $10k.
  - ttcbj 9y ago
    Yes, it is a deduction of 20%.
    - 9y ago
jermaustin1 9y ago
This was a handy guide. I learned something. I was under the assumption the 20% deduction was only on the income you took as a distribution, NOT all of the income. I literally jumped for joy... then I read #5, and had a sad. I still come out better than I originally thought, but not as good as #4 led me to believe.
- jacob019 9y ago
  As I understand it, your original assumption was correct. The 20% only applies to distribution income, not to W-2 income. But the 20% deduction is limited to 50% of the W-2 income. So to maximize the deduction and minimize payroll taxes, the business owner will try to set his W-2 wages at 40% of the pass-through income, or two sevenths (~28.57%) of the business income before owner wages.
ttcbj 9y ago
Thanks for posting this, I have been looking for just such a summary. I think I will be a significant beneficiary of this provision (as I currently understand it, anyway), but I agree with other commenters that I wish we could just make things simpler and more fair. Over the last 10 years I have had experience with small business taxes, small business retirement plans, and various estate-tax avoidance schemes. The tax code is a joke. It rewards people who have the resources to game it, and it employs an entire class of people who specialize in doing just that. Its demoralizing, but while it exists, everyone has to play the game. Edit: Also, that same site has an even more detailed summary of the deduction here: https://evergreensmallbusiness.com/sec-199a-qualified-business-income-deduction/ https://evergreensmallbusiness.com/sec-199a-qualified-busine...
- freehunter 9y ago
  Agreed. As a small business (pass through LLC) owner, I'm willing to pay just about any tax that's demanded of me as long as every one of my peers is subject to the exact same taxation. If the tax is so high that it puts me out of business, I want to know that every one of my competitors is out of business, too. If the tax is so high it forces me to close my physical shop and go online, I want to know my competitors are all closing their doors too. And if I'm making record profits, hey now I can focus on competing on the merits of my product. But if I have to shut down while my competitors stay open just because they hired a better CPA? Especially as a small business? That's a problem for me. A much bigger problem than the tax rate being 22% instead of 21%.
- rsync 9y ago
  "I agree with other commenters that I wish we could just make things simpler and more fair." That's what was so nice about a pass-through entity: It was both politically and revenue neutral. All of the profits flowed through to the taxpayer and the politics and revenue occurred there. Terms like "fairness" had no relevance to them. It could not have been simpler and it was completely outside the sphere of the political discussion on taxes. But now, by answering a question that nobody asked, the new tax code politicizes the passthrough entity and, in my opinion, will eventually lead to its discontinuance - or at the very least, layers of complication added every time we revisit this topic. I benefit maximally from this change to passthrough entities but it is a benefit I never asked for and that will hurt me (and all of us) in the long term.
aantix 9y ago
Another detailed summary of the pass-thru changes. http://rsmus.com/what-we-do/services/tax/washington-national-tax/final-pass-through-rules-mostly-favors-middle-market-and-real-es.html http://rsmus.com/what-we-do/services/tax/washington-national...
Stratoscope 9y ago
I'm no expert, but from what I've seen, many people who are reading this should not get their hopes up. If you're a software developer operating either as a sole proprietorship or as an S corporation, I don't think you'll get the deduction. (If you have an LLC, that doesn't mean anything to the IRS; it's treated either as a "disregarded entity", i.e. a sole proprietorship, or as an S or C corp if you've taken that election.) See Steve's comment on the article from 12/19 at 2:48 PM, replying to someone asking whether developers and other IT professionals would get this break: > The Sec. 199A statute references another older chunk of tax law, Sec 1202(e)(3)(A). It says this: > “…any trade or business involving the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees…” > So computer/IT consulting pretty clearly fits within the “consulting” category. > Also, if you’re a one person business, it seems pretty tricky to argue against the position that the principal asset of the business is the reputation or skill of the 1 employee doing the work. I would appreciate correction if I'm misunderstanding this, as I certainly like tax deductions!
- freehunter 9y ago
  > Also, if you’re a one person business, it seems pretty tricky to argue against the position that the principal asset of the business is the reputation or skill of the 1 employee doing the work. What if you're a one-person business but you're a reseller or a consignment shop like most mom-and-pop stores? That takes very little skill or reputation. Not trying to argue, that's an actual legitimate question I have.
  - munk-a 9y ago
    As a business we can assume you're bringing something to the table, that bests your competitors, is it the skill with which you've built your distribution chain? Your reputation for being able to move goods? I don't see how that vague wording couldn't be expanded to cover everyone, it'd certain cover Trump with his self-professed "Brand Name Value" pretty much all he ever sells is his name.
tunesmith 9y ago
Does this change the incentives on how S-Corps structure salary versus distribution? Sometimes people keep salary low (but still "reasonable") and distributions high to limit FICA. Other times people inflate their salary (and keep distributions low) to be able to contribute more to 401k profit-matches and social security. Since it's a pass-through, it seems like taxable income might be roughly the same either way, so maybe it doesn't impact the size of the deduction all that much. Has anyone thought through this?
- Justin_K 9y ago
  Really interested in this also. Do share a link if you come across it. So far I have seen conflicting info on the 70/30 rule.
- CPLX 9y ago
  > to be able to contribute more to... social security I don't think that makes a whole lot of sense. Do people actually do that?
  - rsync 9y ago
    I doubt many people expand their salary to maximize social security contributions but I can say with certainty that people expand their salary to allow maximal 401k contributions, which your parent also referred to ...
    - CPLX 9y ago
      Well right. It's that social security idea that seems nuts. Hence my question.
  - meritt 9y ago
    Why do you think that's absurd? Social Security is basically a very inefficient (and potentially insolvent) retirement plan. The more you put into it, the more you should get out. That's why people would want to maximize contributions.
the_cat_kittles 9y ago
if you are happy that you can save some money this way, i think you are super lame. i am sad that over paid people like me and most of yall are now even less responsible for helping poor people (among other things, i know... )
- abfan1127 9y ago
  like freeing up income to donate to charities that actually move people out of poverty?
  - chrisan 9y ago
    is that the first thing on people's mind when they take home more money?
    - guelo 9y ago
      No.
  - the_cat_kittles 9y ago
    im all for that, but i doubt that this provision in the tax bill is going to result in a net increase in charitable giving. and its compounded by the fact that r’s will use the huge deficit they just created as an argument for cutting services for poor people.
- bassman9000 9y ago
  You can always donate the surplus to private entities.
  - emodendroket 9y ago
    I feel like the people decrying the tax bill do not consider that an adequate means of addressing the problem.
- pascalxus 9y ago
  First of all, this bill mainly helps those earning less than 315K per family < 157K for singles. If you're making a big salary working for tech, your not as well off as you think. You may be earning x10 more than a the average "poor" person, but after income taxes, sales tax, property tax, etc, it's barely x5 to x6. And if google forces you to live on the penninsula, then your living costs are x5 to x10. I'm sure there are plenty of high tech working families in 150k to 250k range who are barely making ends meat. Those with kids will be especially hit hard: the exemption for those kids is now gone. Millenials in CA are being hit really hard with this housing crisis: the birth rate is at it's lowest it's ever been since the great depression in 1933.
mpolichette 9y ago
Super nit pick: Is it just me or is it a bit disheartening that they have defined this using the term `thru` which google defines as `informal spelling of through`? Isn't a legal document about as formal as one can get? I'm just worried it opens opportunity for confusion from the ambiguousness of language. Slippery slope: Next thing we'll see is a law defining how much of a deduction you get with the money with wings emoji.
- pfranz 9y ago
  Maybe it was to reduce ambiguity? Often legal documents define terms up front ("the participant" refers to John Doe). If they choose a common work like "is" or "through" it can become a rubik's cube trying to correctly discuss it.
cmurf 9y ago
The plan would also provide many pass-through businesses with a 20 percent deduction for pass-through business income. Specified service business would be ineligible, except for households with taxable income below $157,500 for single filers and $315,000 for married filers. This provision reduces revenue by $289 billion. The pass-through provisions expire at the end of 2025. https://taxfoundation.org/final-tax-cuts-and-jobs-act-details-analysis/ https://taxfoundation.org/final-tax-cuts-and-jobs-act-detail...
tuna-piano 9y ago
As someone with a pass-they entity (s Corp) who has done my own personal and business taxes (with payroll for myself from gusto/ zen payroll)... this all seems so complicated i expect to hire an accountant for the first time next year. How the hell is this being touted as making the tax code simpler?
SeattleCPA 9y ago
A friend pointed me to this discussion since it references the blog posts I've done at evergreen small business... I've read through the thread of comments and first thing I would add is, this will all become at least a little clearer once we get some detailed guidance later next year. One other thing to share: If you have pass-thru income, be sure you understand before the new year starts how the limitations work and how the deduction formula works. You can possibly increase your savings by maximizing qualified business income (the number that gets plugged into the formula) and by doing things to sidestep the limitations. Example: If you need wages, look at the S corporation option. Another example: If you're in a partnership, make sure you're not artificially depressing your qualified business income by using guaranteed payments.
mrfusion 9y ago
Does it not apply for LLC s? What about software freelancers?
tabeth 9y ago
I wonder if it'd be simpler to just eliminate all taxes except sales tax and have a progressive sales tax. For example: $0 - $20,000 - 0% (yes, poor people wouldn't pay sales tax. You could even make it so poor people get a discount, even.) $20,001 - $40,000 - 5% etc. The above tiers would be defined by income plus assets times some interest rate, to represent potential gain on assets, if it were liquidated and invested. So if you had 1M in assets, and made $100,000 a year, your income would be $100,000 + 1M * federally defined interest rate. The main difficulty with this would be that debit/credit cards would have to be issues by the government or there would have to be some collaboration between the government and banks in order to accurately determine purchases.
- bungie4 9y ago
  Your assuming the very rich purchase proportionately more taxable goods and service than the lower classes do.
  - tabeth 9y ago
    Well the idea is that the money will eventually be spent or transfered, and then during that event it would be taxed. I mean sure you could just let the money grow but I assume it would either be given to someone or spent eventually.
    - snotrockets 9y ago
      rich-old-men-laughing.jpg
deleted 9y ago
[deleted]

88 points by ljoshua 9y ago

One of the worst things about the current tax code (and soon-to-be new tax law) is the cost of compliance. You can argue about high tax or low tax and who should pay more than whom, but cost and time to comply does not create any value and is an artificial way that we make our country less competitive. This article is a clear example of that, laying out 10 different things you need to know with complicated formulas for deduction and professions that do and do not get benefits. What a mess.

maxxxxx 9y ago
Congress is full of lawyers who assume that everyone has access to lawyers. That's why everything is so complex. In reality the big guys have lawyers on retainer and can handle the laws and the little guy is at a disadvantage. The same happens in a lot of companies. IT develops rules for IT people and the regular user is screwed.
- emodendroket 9y ago
  > Congress is full of lawyers who assume that everyone has access to lawyers. That's why everything is so complex. In reality the big guys have lawyers on retainer and can handle the laws and the little guy is at a disadvantage. Generally these changes have some sort of champion requesting them and don't just arise from the ether. I'm not sure we can explain it all away as Congress not realizing that their decisions will advantage large business interests at the expense of smaller ones, particularly when the beneficiaries are also sponsors.
joelrunyon 9y ago
This. I think I would be willing to pay a higher total flat tax if it was just simpler. Right now, I spend a few thousand/year and an annoying amount of time to make sure I'm doing it right.
- munk-a 9y ago
  I think everyone* wants this, and this is how it works in Sweden where most people get mailed a pre-filled tax form and just have to vet the information and direct the refund/pay the bill. In the US there is a not small industry of tax preparers that exists solely due to the complexity of our tax code. The complexity is there to keep H&R Block, TurboTax etc... in business by encouraging middle/low income people to keep returning to them every year. I am amazed at how far from the stated goal of "We want you to do your taxes on an index card" this bill is going to come out as... and saddened that the majority of voters supporting the GOP won't feel fleeced by it. *(with the exception of those preparers that very much want to keep the complexity and rich people/large businesses that can exploit loopholes effectively)
  - joelrunyon 9y ago
    I'm not sure people will feel "fleeced" since most people (~80%) are getting a tax cut - https://www.washingtonpost.com/graphics/2017/business/tax-bill-calculator/?utm_term=.38d3832f7d71 https://www.washingtonpost.com/graphics/2017/business/tax-bi...
    - curun1r 9y ago
      They'll only feel fleeced when the follow-up cuts to Social Security and Medicare get felt. Republicans have been very careful to say that only the benefits of current recipients of those programs won't see cuts. The rest of us who aren't yet retired will take a pretty huge hit in retirement. That's where we're being fleeced. Perhaps the people who look at a tax return as free money from the government won't feel fleeced, but anyone who understands the concept of saving for retirement should be able to put together that we're having our tax burden lessened by $1k-$2k per year and, in exchange, needing to almost entirely fend for ourselves in retirement.
      - joelrunyon 9y ago
        > Perhaps the people who look at a tax return as free money from the government won't feel fleeced It's not a tax return, it's a tax cut. That means the government is taking less money from me (not giving me more money). I don't know anyone under 35 that's actually counting on SS on being there for them (not saying they're happy about, but most realized 10+ years ago that it's not gonna happen). That was a reality before this happened.
jfaucett 9y ago
completely agree with this sentiment. I've often wished a test city/state would be allowed to just do a flat tax and completely remove all tax code and see what happens. Obviously the convolutedness is a barrier to entry to small startups and a unfair advantage for established market entities. Also I'd love to see an experiment on a zero tax law that basically amounted to no taxes unless the business/person earned a net profit of something deemed reasonable (say 30-50k in a modern society). Why our societies constantly try to suffocate individuals trying to innovate and create value for his fellow members of society is beyond me.
- techsupporter 9y ago
  > I've often wished a test city/state would be allowed to just do a flat tax I don't want a flat tax (as in "all income taxed at 15%," let's say) because a flat tax has an unfair impact on people at lower income levels. But, otherwise, I agree with your entire post. Here's my ideal law, with the caveat that I have zero legal training beyond six seasons of Law and Order and four seasons of Suits: (1) The following marginal rates are established: (Emphasis here: these numbers are made up for demonstration purposes only.) - $0 through $13,000: 0% - $13,001 through $25,000: 5% - $25,001 through $46,000: 8% - and so on (2) All money earned, by whatever means and from whatever source, by a person or legal entity resident in the United States shall be subject to the tax specified above. (3) The Internal Revenue Service shall, no later than the 15th of April of each calendar year (or the next day following the business day after the 15th of April if the 15th of April falls on a Saturday, Sunday, or federal holiday), prepare and mail to each holder of an EIN, each person for whom any tax or income declaration form (such as W2, 1098, 1099, and similar) has been submitted to the IRS, a statement of what the IRS believes the taxpayer owes or is due as a refund. (4) If the IRS has notified the taxpayer that the IRS believes the taxpayer is due a refund, the taxpayer may notify the IRS of a financial account located inside the United States into which such refund shall be deposited or may request a paper check for such refund or, under such rules as the Secretary shall provide, make a request for United States Savings Bonds. Any request must be made within five years of the date the taxpayer knew or reasonably should have known that the refund was due, otherwise the refund is the property of the Treasury absent a showing of exigence. (5) If the IRS has notified the taxpayer that the IRS believes the taxpayer owes additional taxes, the taxpayer shall make payment to the IRS no later than the 15th of July following receipt of said notice (or the next day following the business day after the 15th of July if the 15th of July falls on a Saturday, Sunday, or federal holiday) by providing the IRS with debit instructions for a financial account located inside the United States or via a paper check or other form of transfer of dollars. (6) In the case that the taxpayer disagrees with a notice provided by the IRS under paragraphs 5 or 6, the taxpayer shall, no later than the 15th of July following receipt of said notice (or the next day following the business day after the 15th of July if the 15th of July falls on a Saturday, Sunday, or federal holiday), file the tax forms designated by the IRS under such rules as the Secretary shall provide, to indicate what the taxpayer believes is the proper tax due or refund owed. If the taxpayer still owes additional tax, the tax payment shall be due at the time of filing. The IRS shall have 120 days to respond, otherwise the taxpayer's submission is deemed valid and binding upon the IRS. (7) There is no paragraph seven.

perseusprime11 9y ago

Should everyone be thinking of becoming a pass through business? Person Inc. works for Big Business Inc. Everybody pays 20% tax and we are all happy.

o_nate 9y ago
This handy guide lays out some ways that the legislators in their wisdom have sought to curb this understandable impulse. E.g. the allowable deduction is proportional to regular wages paid by the pass-thru business. So you can only take deductions on income of Person Inc if Person Inc also pays wages that are taxed at regular rates. Provisions like that will keep the tax accountants busy.
- Bedon292 9y ago
  I believe you are addressing #8 on the link. This only applies to high income earners. So if you are under those thresholds you don't need to pay any additional employees.
nodejsbangalore 9y ago
I might be wrong but I think that tax rate is not 20%. I think the deduction is 20%. If I understand it correctly then what it means is that if you have earned $100k then you are taxed only on $80k and 20% (20K in this case) is your deduction. Can someone confirm/deny it.
- jermaustin1 9y ago
  90% confirm. If your company earned $100k, and paid you $50k, you can deduct 20% of the 100k capped at 20% of your ordinary income ($50k), for a total deduction of $10k.
- ttcbj 9y ago
  Yes, it is a deduction of 20%.
  - 9y ago

jermaustin1 9y ago

This was a handy guide. I learned something. I was under the assumption the 20% deduction was only on the income you took as a distribution, NOT all of the income. I literally jumped for joy... then I read #5, and had a sad. I still come out better than I originally thought, but not as good as #4 led me to believe.

jacob019 9y ago
As I understand it, your original assumption was correct. The 20% only applies to distribution income, not to W-2 income. But the 20% deduction is limited to 50% of the W-2 income. So to maximize the deduction and minimize payroll taxes, the business owner will try to set his W-2 wages at 40% of the pass-through income, or two sevenths (~28.57%) of the business income before owner wages.

ttcbj 9y ago

Thanks for posting this, I have been looking for just such a summary. I think I will be a significant beneficiary of this provision (as I currently understand it, anyway), but I agree with other commenters that I wish we could just make things simpler and more fair. Over the last 10 years I have had experience with small business taxes, small business retirement plans, and various estate-tax avoidance schemes. The tax code is a joke. It rewards people who have the resources to game it, and it employs an entire class of people who specialize in doing just that. Its demoralizing, but while it exists, everyone has to play the game. Edit: Also, that same site has an even more detailed summary of the deduction here: https://evergreensmallbusiness.com/sec-199a-qualified-business-income-deduction/ https://evergreensmallbusiness.com/sec-199a-qualified-busine...

freehunter 9y ago
Agreed. As a small business (pass through LLC) owner, I'm willing to pay just about any tax that's demanded of me as long as every one of my peers is subject to the exact same taxation. If the tax is so high that it puts me out of business, I want to know that every one of my competitors is out of business, too. If the tax is so high it forces me to close my physical shop and go online, I want to know my competitors are all closing their doors too. And if I'm making record profits, hey now I can focus on competing on the merits of my product. But if I have to shut down while my competitors stay open just because they hired a better CPA? Especially as a small business? That's a problem for me. A much bigger problem than the tax rate being 22% instead of 21%.
rsync 9y ago
"I agree with other commenters that I wish we could just make things simpler and more fair." That's what was so nice about a pass-through entity: It was both politically and revenue neutral. All of the profits flowed through to the taxpayer and the politics and revenue occurred there. Terms like "fairness" had no relevance to them. It could not have been simpler and it was completely outside the sphere of the political discussion on taxes. But now, by answering a question that nobody asked, the new tax code politicizes the passthrough entity and, in my opinion, will eventually lead to its discontinuance - or at the very least, layers of complication added every time we revisit this topic. I benefit maximally from this change to passthrough entities but it is a benefit I never asked for and that will hurt me (and all of us) in the long term.

aantix 9y ago

Another detailed summary of the pass-thru changes. http://rsmus.com/what-we-do/services/tax/washington-national-tax/final-pass-through-rules-mostly-favors-middle-market-and-real-es.html http://rsmus.com/what-we-do/services/tax/washington-national...

Stratoscope 9y ago

I'm no expert, but from what I've seen, many people who are reading this should not get their hopes up. If you're a software developer operating either as a sole proprietorship or as an S corporation, I don't think you'll get the deduction. (If you have an LLC, that doesn't mean anything to the IRS; it's treated either as a "disregarded entity", i.e. a sole proprietorship, or as an S or C corp if you've taken that election.) See Steve's comment on the article from 12/19 at 2:48 PM, replying to someone asking whether developers and other IT professionals would get this break: > The Sec. 199A statute references another older chunk of tax law, Sec 1202(e)(3)(A). It says this: > “…any trade or business involving the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees…” > So computer/IT consulting pretty clearly fits within the “consulting” category. > Also, if you’re a one person business, it seems pretty tricky to argue against the position that the principal asset of the business is the reputation or skill of the 1 employee doing the work. I would appreciate correction if I'm misunderstanding this, as I certainly like tax deductions!

freehunter 9y ago
> Also, if you’re a one person business, it seems pretty tricky to argue against the position that the principal asset of the business is the reputation or skill of the 1 employee doing the work. What if you're a one-person business but you're a reseller or a consignment shop like most mom-and-pop stores? That takes very little skill or reputation. Not trying to argue, that's an actual legitimate question I have.
- munk-a 9y ago
  As a business we can assume you're bringing something to the table, that bests your competitors, is it the skill with which you've built your distribution chain? Your reputation for being able to move goods? I don't see how that vague wording couldn't be expanded to cover everyone, it'd certain cover Trump with his self-professed "Brand Name Value" pretty much all he ever sells is his name.

tunesmith 9y ago

Does this change the incentives on how S-Corps structure salary versus distribution? Sometimes people keep salary low (but still "reasonable") and distributions high to limit FICA. Other times people inflate their salary (and keep distributions low) to be able to contribute more to 401k profit-matches and social security. Since it's a pass-through, it seems like taxable income might be roughly the same either way, so maybe it doesn't impact the size of the deduction all that much. Has anyone thought through this?

Justin_K 9y ago
Really interested in this also. Do share a link if you come across it. So far I have seen conflicting info on the 70/30 rule.
CPLX 9y ago
> to be able to contribute more to... social security I don't think that makes a whole lot of sense. Do people actually do that?
- rsync 9y ago
  I doubt many people expand their salary to maximize social security contributions but I can say with certainty that people expand their salary to allow maximal 401k contributions, which your parent also referred to ...
  - CPLX 9y ago
    Well right. It's that social security idea that seems nuts. Hence my question.
- meritt 9y ago
  Why do you think that's absurd? Social Security is basically a very inefficient (and potentially insolvent) retirement plan. The more you put into it, the more you should get out. That's why people would want to maximize contributions.

the_cat_kittles 9y ago

if you are happy that you can save some money this way, i think you are super lame. i am sad that over paid people like me and most of yall are now even less responsible for helping poor people (among other things, i know... )

abfan1127 9y ago
like freeing up income to donate to charities that actually move people out of poverty?
- chrisan 9y ago
  is that the first thing on people's mind when they take home more money?
  - guelo 9y ago
    No.
- the_cat_kittles 9y ago
  im all for that, but i doubt that this provision in the tax bill is going to result in a net increase in charitable giving. and its compounded by the fact that r’s will use the huge deficit they just created as an argument for cutting services for poor people.
bassman9000 9y ago
You can always donate the surplus to private entities.
- emodendroket 9y ago
  I feel like the people decrying the tax bill do not consider that an adequate means of addressing the problem.
pascalxus 9y ago
First of all, this bill mainly helps those earning less than 315K per family < 157K for singles. If you're making a big salary working for tech, your not as well off as you think. You may be earning x10 more than a the average "poor" person, but after income taxes, sales tax, property tax, etc, it's barely x5 to x6. And if google forces you to live on the penninsula, then your living costs are x5 to x10. I'm sure there are plenty of high tech working families in 150k to 250k range who are barely making ends meat. Those with kids will be especially hit hard: the exemption for those kids is now gone. Millenials in CA are being hit really hard with this housing crisis: the birth rate is at it's lowest it's ever been since the great depression in 1933.

mpolichette 9y ago

Super nit pick: Is it just me or is it a bit disheartening that they have defined this using the term `thru` which google defines as `informal spelling of through`? Isn't a legal document about as formal as one can get? I'm just worried it opens opportunity for confusion from the ambiguousness of language. Slippery slope: Next thing we'll see is a law defining how much of a deduction you get with the money with wings emoji.

pfranz 9y ago
Maybe it was to reduce ambiguity? Often legal documents define terms up front ("the participant" refers to John Doe). If they choose a common work like "is" or "through" it can become a rubik's cube trying to correctly discuss it.

cmurf 9y ago

The plan would also provide many pass-through businesses with a 20 percent deduction for pass-through business income. Specified service business would be ineligible, except for households with taxable income below $157,500 for single filers and $315,000 for married filers. This provision reduces revenue by $289 billion. The pass-through provisions expire at the end of 2025. https://taxfoundation.org/final-tax-cuts-and-jobs-act-details-analysis/ https://taxfoundation.org/final-tax-cuts-and-jobs-act-detail...

tuna-piano 9y ago

As someone with a pass-they entity (s Corp) who has done my own personal and business taxes (with payroll for myself from gusto/ zen payroll)... this all seems so complicated i expect to hire an accountant for the first time next year. How the hell is this being touted as making the tax code simpler?

SeattleCPA 9y ago

A friend pointed me to this discussion since it references the blog posts I've done at evergreen small business... I've read through the thread of comments and first thing I would add is, this will all become at least a little clearer once we get some detailed guidance later next year. One other thing to share: If you have pass-thru income, be sure you understand before the new year starts how the limitations work and how the deduction formula works. You can possibly increase your savings by maximizing qualified business income (the number that gets plugged into the formula) and by doing things to sidestep the limitations. Example: If you need wages, look at the S corporation option. Another example: If you're in a partnership, make sure you're not artificially depressing your qualified business income by using guaranteed payments.

mrfusion 9y ago

Does it not apply for LLC s? What about software freelancers?

tabeth 9y ago

I wonder if it'd be simpler to just eliminate all taxes except sales tax and have a progressive sales tax. For example: $0 - $20,000 - 0% (yes, poor people wouldn't pay sales tax. You could even make it so poor people get a discount, even.) $20,001 - $40,000 - 5% etc. The above tiers would be defined by income plus assets times some interest rate, to represent potential gain on assets, if it were liquidated and invested. So if you had 1M in assets, and made $100,000 a year, your income would be $100,000 + 1M * federally defined interest rate. The main difficulty with this would be that debit/credit cards would have to be issues by the government or there would have to be some collaboration between the government and banks in order to accurately determine purchases.

bungie4 9y ago
Your assuming the very rich purchase proportionately more taxable goods and service than the lower classes do.
- tabeth 9y ago
  Well the idea is that the money will eventually be spent or transfered, and then during that event it would be taxed. I mean sure you could just let the money grow but I assume it would either be given to someone or spent eventually.
  - snotrockets 9y ago
    rich-old-men-laughing.jpg

deleted 9y ago

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