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The federal tax reform law created a new business income deduction for 92% of businesses in the United States, and during a recent NJBIA webinar, an expert from Putnam Investments walked small businesses owners through the details so they don’t miss out on it.
The recent reduction of the corporate tax rate from a marginal 35% to a flat 21% has grabbed all the headlines, but it affects only the very largest companies, said Patrick Caine, senior wealth management specialist at Putnam Investments. Most U.S. businesses, 92%, are pass-through entities — S-Corps, LLCs, sole proprietors or general partnerships. The Tax Cut and Jobs Act of 2017 gave them something else: a new 20% qualified business income (QBI) deduction.
Caine said taxpayers who flow business income through personal returns must keep two “golden numbers” in mind: $160,700 if they file as a single taxpayer and $321,400 if they file as married. Those are the taxable income thresholds business owners must fall under to take the full 20% QBI deduction.
“So if you’re a sole proprietor, and you make $100,000 a year as a plumber, you’ll be able to take that $20,000 right off your taxable income because of this law,” Caine said. “And if you’re a dentist, married, and making $300,000 a year, you’ll be able to take $60,000 off of your business income.”
Any business owner whose taxable household income exceeds these thresholds should talk to their financial adviser or accountant about tax reduction strategies that would lower their taxable income enough to take advantage of the full QBI deduction, Caine said.
“Ask them, should I be putting more away in a retirement plan? Might it be beneficial to open up a cash balance pension plan in addition to the profit sharing 401(k)? That way you can get down below the threshold and qualify for this deduction,” Caine said.
Beyond the QBI, there are many other ways to manage your income Caine said. In addition to saving more for retirement you can spend more money on your business.
“Under Section 179, anything you spend on office equipment, furniture or software for your business can be immediately expensed at 100%,” Caine said. “Additionally, there’s a bonus depreciation available as well, so really it’s about how all these work together.”
Most business owners are aware of the new loans available through the Paycheck Protection Program (PPP) and the Economic Injury Disaster Loan (EIDL) programs to help them survive the economic fallout from COVID-19, but there are also tax credits available, such as the employee retention tax credit.
“Let’s say your business was shut down and you continued to pay employees – that is a tax credit that I would consider,” Caine said. “There’s also the deferral of payroll and Social Security taxes.”
However, businesses should be aware that if they take the PPP, they are no longer be eligible for the employee retention tax credit, Caine said. Business owners should have their accountant run the numbers and then advise them on whether the loans or the tax credit provides the most value, he said.
To hear the entire webinar, which also covered how to organize your business to protect assets, as well as retirement planning options and succession strategies, go here.