New Pass Through Deduction

[BulldogTom]

I am reading up on this provision, and I am a little confused (Yes Jack, I know the ink isn't dry yet, can we dispense with that post).  

It says that the owner of a pass through may deduct 20% of the income generated from the business.  OK, that works.  Limited to 315K of income if it is a professional service company.  I get that too.  Then it goes into a 50% limitation on the W2 income.  This is where I get confused.

Lets say my client owns an engineering firm taxed as an S Corp.  He takes a salary of 150K per year as President.   At the end of the year, after taking his salary into consideration, he has 200K of income from the business.   I think he gets a 40K deduction?   And that 40K is less than 50% of his W2 salary, so we are good.

Change the salary to 50K though, which makes his Pass Through Income go up to 300K, and he only gets to take a 25K deduction because of the W2 Wage limitation.

Now lets make him a Sole Proprietor.  He has no salary, his income is now 350K, and he gets no deduction because he does not have W2 salary from the business and his pass through income exceeds the threshold. 

Is this correct on how this works?

Thanks in advance.

Tom
Modesto, CA

[Lee B]

I think you have the S Corp/PTS right. I haven't seen anything about how the SP will work

[Lee B]

O K, I read the bill carefully and if the Qualified Business Income is under the Threshold Amount of MFS $ 157,500 or MFJ $ 315,000

then the limitation of 50 % of the W -2 Income is not applied. Therefore a SP with Qualified Income under the Threshold Amount would get a 20 % deduction.

For S Corp there are special anti-abuse rules that would prevent an S Corp owner from taking this deduction if he took $ 0 wages.

[grmy2h]

This seems to work somewhat like the DPAD. It looks almost as if it's taking its place. I do believe this will be less confusing and easier to figure out.

[BulldogTom]

14 hours ago, cbslee said:

O K, I read the bill carefully and if the Qualified Business Income is under the Threshold Amount of MFS $ 157,500 or MFJ $ 315,000

then the limitation of 50 % of the W -2 Income is not applied. Therefore a SP with Qualified Income under the Threshold Amount would get a 20 % deduction.

For S Corp there are special anti-abuse rules that would prevent an S Corp owner from taking this deduction if he took $ 0 wages.

OK, that makes sense.   And if it works like the DPAD, I can get my head around that.  I have played with that one before.

What about the SP with Qualified income OVER the threshold?   There must be something in there that gives relief?  If the guy in my example makes 350K, he is SOL?  Sounds counter-intuitive. 

Thanks

Tom
Modesto, CA

[Christian]

Once passed I will need to review this carefully. For Schedule C filers I am wondering if the 20% is deducted from the Schedule C. I rather doubt they will allow this as the owner would also reduce his SE tax on the 20%.

[Lee B]

It's a deduction against taxable income not against SE Income.

[Christian]

I just knew it was too much to hope for. 

[Abby Normal]

23 hours ago, Christian said:

Once passed I will need to review this carefully. For Schedule C filers I am wondering if the 20% is deducted from the Schedule C. I rather doubt they will allow this as the owner would also reduce his SE tax on the 20%.

Do they really consider Sch Cs a pass-thru entity?

[Lee B]

Yes, plus they are specifically mentioned in the text of the law.

[Christian]

I have to agree Abby. I never thought of  a sole proprietorship as being a pass through entity. I like my profit to pass directly into my pocket.