The Tax Cuts and Jobs Act (TCJA) passed in December 2017 made significant changes to the income tax laws for 2018 and beyond. The new legislation introduced some major adjustments to business tax law, including a lower corporate tax rate, new rules for pass-through businesses, and a tax break for some industries.
One of the more important provisions of the TCJA is the new deduction for qualified business income (QBI). This provision permits a deduction for up to 20% of QBI from sole proprietorships, partnerships, limited liability companies (LLCs), S corporations (S corps), trusts, and estates.
The computation of QBI can be fairly simple or unbelievably complicated, depending on your unique business situation. So it’s wise to talk with your accountant or CPA to make sure you are capitalizing on the nuances of this deduction.
Additionally, the new legislation will result in increased scrutiny of the reasonable compensation for shareholders-employees of S corps. The IRS lists nine factors on their website that the courts take into consideration when looking at reasonable compensation. Depending on your company’s circumstances, any or all of these may come into play – but 1 through 3 are likely to be the most critical:
Training and experience
Duties and responsibilities
Time and effort devoted to the business
Payments to non-shareholder employees
Timing and manner of paying bonuses to key people
What comparable businesses pay for similar services
The use of a formula to determine compensation
These are not the only changes that could have an impact on your 2018 small business taxes, and it is important that you calculate your business income correctly and take advantage of all the deductions available. Now is an ideal time to reach out to your tax professional and discuss the implications of the TCJA for you and your business. As always, I’m here to help.