We’re digging into the new guidance from the IRS re: the 20% deduction for Qualified Business Income (section 199A), and we’re excited to begin planning around these rules on behalf of our business owner clients.
What the IRS has done is offer more meat to the bones of these provisions, which can be summed up as follows:
Essentially, owners of sole proprietorships, S corporations, or partnerships can deduct up to 20% of the income earned by the business. Note that this is NOT restricted to LLC’s, as I have seen some insist. Sole proprietorships also qualify for this deduction.
However, there are two big exceptions, and a slew of new, more technical guidances that I won’t bore you by getting extremely granular about:
- The “Qualified Trade or Business” may not be an entity whose sole purpose is to provide services for an employer, but don’t have any other business “clients” that your entity serves.
This provision is designed to prevent employees from claiming the 20% deduction against what is essentially their wage income.
- The Qualified Trade or Business must NOT be “…any trade or business involving the performance of services in the fields of health, law, 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 one or more of its employees or owners.”
This provision is designed to target business OWNERS (rather than employees, as in the first provision), and to prevent the conversion of personal service income into “qualified business income”.
The good news is that when you get into the weeds, there are rules that we can take advantage of that might help you through these exceptions.
But we certainly can’t leverage on your behalf without some thought in advance.
So, if you have questions about this, set up a tax planning appointment with us, and we’d be glad to dig into your details. (303) 327-9749 (or shoot me back an email by clicking the email us button at the top of the page.)
Alright, now that I’ve had opportunity to wear my green shades for a little while in this strategy note, I’m going to finish it off with a short rant … hopefully you receive it in a spirit of encouragement.
Execution Is Everything When It Comes To The Success Of An Idea For Small Businesses
“Honesty is the first chapter in the book of wisdom.” – Thomas Jefferson
While I wasn’t in client tax work, I spent some time over the weekend looking at various academic articles about entrepreneurship (yes, I’m an egghead).
And aside from the unrealistic reliance on the VC model for many small businesses, there was something else that continues to nag me about the undergirding assumption around starting new businesses in the research articles.
Essentially, it is the over-emphasis on the notion of the BIG IDEA, as the primary component to a successful entrepreneurial venture.
You see, the big idea isn’t the “holy grail”. No, the main ingredient of success is the execution. Trust me — I see behind the scenes of many businesses.
But those who fall for the Big Idea Myth jump into idea after idea, full of excitement and ambition, only to fall flat. It’s a simple matter that they fail to realize that success comes from execution, *not* the idea.
On the other side are the entrepreneurs and budding business owners who are too afraid to act. They think, analyze and talk until they’re blue in the face, but they don’t take action. Their paralysis keeps them in their cushy corporate job or in the comfort zone of their modest small business. They’re paralyzed, and unable to jump in and act.
Yes, I’m a tax professional — and averse to unreasonable risk. But I believe that the key for successful entrepreneurship is to be in the middle of the spectrum: act on the idea (almost any idea will do), but realize that execution is everything.
A good person to follow for this kind of advice (though fair warning: he can be pretty foul-mouthed) is Gary Vaynerchuk. In particular, here’s a video he made a few months back that gets at this idea real well:
Execution is everything, my friend.
So allow us to help you do it right.
Feel very free to forward this article to a business associate or client you know who could benefit from our assistance — or simply send them our way? While these particular articles usually relate to business strategy, as you know, we specialize in tax preparation and planning for families and business owners.
Dickmann Tax Group