55 percent of Minnesota CPAs say qualified business income deduction has most opportunity, questions this coming tax season
MINNEAPOLIS (Dec. 17, 2018) — This tax filing season will be the first in which taxpayers and tax preparers will see the 2017 Tax Cuts and Jobs Act’s (TCJA) changes implemented on federal forms. Among those changes, one of the most complex that has the attention of more than half of certified public accountants surveyed by the Minnesota Society of Certified Public Accountants (MNCPA) is the Qualified Business Income (QBI) deduction.
“The QBI deduction is the most complicated piece of tax legislation that I have seen in my career that applies to a broad spectrum of individual taxpayers,” said Chris Wittich, CPA, MBT, senior manager at Boyum Barenscheer. “The calculations themselves can be complicated, and the limitations are numerous and confusing.”
The MNCPA this fall asked its public practice members which of the many changes in the Tax Cuts and Jobs Act has their attention for this coming tax season. Of the 110 responses it received, 55 percent said the QBI deduction is the new tax benefit that rises to the top of their list as providing the most opportunity -- and the most questions -- for their clients.
And, because of its nuances and complexity, the QBI deduction and its benefits may go underused or unused.
“It’s a huge opportunity for business owners to save money, so the QBI deduction needs to be examined for every business that is a pass-through entity. But, business owners need to be mindful of the limitations because, without proper planning, it’s also a huge opportunity to miss out on free money,” added Wittich.
What is the QBI deduction?
Also referred to as Section 199A, the QBI deduction allows pass-through entities (such as partnerships, S corporations and sole proprietorships) to deduct up to 20 percent of their business income. In general, the applicable thresholds for 2018 are $315,500 for married filing jointly or $157,500 for single filers. There are limitations for those individuals under the threshold, but there are different and additional limitations for those over the threshold. For example, some individuals over the threshold will not be eligible to claim the QBI deduction depending on their industry, while others will be limited to a partial deduction.
While every taxpayer’s situation is different, there are some opportunities many may not be aware of where the QBI deduction can be utilized or maximized. Proposed regulations came out this fall and final regulations are expected soon that will provide further guidance.
Saving for retirement
Small-business owners who have not put money away for retirement have a new incentive to start saving. Depositing money into a qualified retirement account will help to reduce taxable income, and place individuals below the Section 199A income thresholds so they can take advantage of the full 20 percent QBI deduction. Understanding the types of retirement accounts available to a business owner is a critical part of tax planning.
Benefits for side hustles
Ever consider an Uber driver as a small-business owner? Now, according to the IRS, “gig” jobs or other freelance jobs could qualify an individual as a small business, making them possibly eligible for the QBI deduction.
That being said, a side hustle, like being an Uber driver, can be seen two different ways by the IRS: either as self-employment income or as hobby income. Those two options can either significantly increase or decrease your tax liability depending on your personal tax situation. That’s why it’s important for anyone with gig jobs to consult a certified public accountant.
Great opportunity, great complexity
The QBI deduction has many benefits, but with those benefits comes immense complexity. There are various rules for using the QBI deduction depending on your income level, meaning you could be following one set of rules one year and a different set of rules next year. On top of that, final regulations from the IRS on Section 199A and the QBI deduction are still forthcoming.
If you’re not eligible for the QBI deduction, there’s still many other options that could apply to your tax situation. For example, the TCJA expanded the use of the cash basis method of accounting for any business with less than $25 million of average annual gross receipts. This is a great opportunity for a one-time deduction as well as continued savings and simplicity.
“The tax law changes this year are the biggest in more than 30 years,” said Wittich. “With the introduction of a host of new concepts, including the QBI deduction, it’s crucial that taxpayers are revisiting their tax strategy and working with a CPA to plan for this tax season and seasons to come.”
If you don’t have a CPA, the MNCPA has a Referral Service where you can search for a CPA by location and specialty. Visit www.CPAmeASAP.com or call 800-331-4288 to find one that best fits your needs.
The Minnesota Society of Certified Public Accountants (MNCPA) serves the public interest by advancing the highest standards of ethics and practice within the CPA profession. The MNCPA delivers on that promise by offering extensive continuing professional education and resources; advocating for members and the public with regulatory agencies and boards; and mentoring and encouraging the CPAs and business leaders of tomorrow. Founded in 1904, the MNCPA has more than 8,500 members who work in public accounting, business, industry, government and education.