20% Business Tax Deduction Explained! (How the 199A Qualified Business Income Deduction Works)
Ladies, and gentlemen how y'all doin Mike the CPA here in today's, video we're gonna be covering the, most complex, new, tax, deductions, for business, owners and that is the, qpi. Deduction, or the qualified, business income deduction, also. Known as the, $1.99. A deduction. Now, learning all this stuff throughout the course of this year in 2018, was, borderline, torture. But, now I get the privilege of being able to torture all of you out there in the land the internet with all this new juicy. Tax knowledge. This. Is gonna be a two part series guys so in this first part we're, gonna cover this in great detail all, the theory the rules what, this, deductions all about and then in another separate. Video I'm gonna have an Excel, document with. Five, full-on, step by step calculation. Examples, that literally took me hours to put together that, I'm gonna be showing to you guys in the next videos of this series I'm, gonna have a link to that video down in the comment section down below and also in the description section of this video so make sure to be looking for it and without. Further ado there's a lot to cover here so let's go ahead and dive right into it do, you remember when you were back in math class and you had to learn an entire new section. Or entire new chapter on math that. Was completely, different than, the previous chapter, do you remember how hard that was well that is kind, of like, what this deduction is it's, a whole brand new frontier, attacks and it's, really different than any other area of tax so you really have to think of, it in that way it's a whole new set of rules and a whole new way to think about things so, you really need to take the time to wrap your head around it to understand it so let's go ahead and get started and I'll keep this video as short and, concise as, I possibly can. So. This do $1.99. A deduction, is stimming, of course from the tax cuts and Jobs Act right the, tax, cuts in Jobs Act was signed into law on December 22nd. And along, with this came the provisions section 199. A. These. New tax savings, are huge imagine. You're a business owner and imagine, your taxable business income is, $100,000. Now we know that the maxi, duction you can get is 20%, now. Pretend that came to you and I said hey mr. and mrs. business owner of your. $100,000. Guess, what because of these new tax rules. $20,000, of that is no, longer, subject, to federal, income taxes, that, is how powerful these deductions are now, let's discuss the more formal definition of, this so for the years beginning on January, first of 2018. All the, way through December 31st. Of 2025. This, deduction is going to be in play and basically, what it means is a taxpayer, other, than a corporation. Got that so if it does not account. For corporations. Is entitled. To a deduction equal. To, 20%, of the taxpayers. Qualified. Business, income, so, qualified business income is defined as the net amount of qualified, items, of income gain. Deduction, and loss with respect to a qualified trade. Or business that is effectively, connected, with, the conduct, of a business, within, the United States. One. Of the things that is going to affect the seduction, is capital, gains whether, there's long term or short term but you guys will see that later on within this video in terms of qualified, business income an area of caution is rental, real estate income they.
The IRS has not ruled one, way or the other or have, provided, guidance to let us know if they're gonna count that as, qualified. Business income which is really unfortunate since, we're getting close to the end of 2018, at the time I'm filming this video historically. Courts. Have ruled in different tax cases in the past that. Even, the ownership. Of a single rental property, could, constitute. Or qualify, as a trade or business you, know it's up to you as a taxpayer, to take the position you want to take on this I'm expecting. We're gonna see more guidance but just keep that in mind whether, you want to put, that account, that rental income as qualified business income or not on your 2018. Tax return. Let's. Talk about now what is not, qualified. Business income what is not, qualified, business income and that is dividend income any, interest. Income net. Gain from foreign currency transactions, income, from national, principle contracts, amounts. Received from an annuity, or really important items that point out here on this list of all of them is compensation, or wages so, your wages, whether, they're from your job or whether, you pay yourself wages from your own business they're, not going to be factored, into your, qbi, income. They, will if you own your own business and pay yourself wages, they. Will help factor, into your qbi deduction, but it's the wages, you pay yourself are not, gonna, factor, into your overall qbi, income, but a lot of people are asking if it's gonna add to your income for qbi purposes, and it's, not also, on this lesson so you guys can see is guaranteed payments guaranteed, payments are not included. In qbi. Income, calculation, the reason this is important, is because obviously. People want to have as high of a qualified, business income as possible, for this deduction because, the higher amount, their business income is the higher, the potential deduction, they could possibly get but, so that's why it's important, to know what. Items do not factor, in to qualified, business income as they're, listed here let's continue. This, one kind of came as a shocker to me but the question was do I need, to be active, in order to qualify for, this, qpi deduction, and the answer is no, at least that's how I understand, it unless things change but, so to the best of my knowledge the answer is no you not have to be active, in the trader business in order to qualify or, receive the deduction the one in a, proposed, riggs indicate, that the tax payers level of involvement in the business does, not matter, if they, meet the requirement, of IRC. Section, one and na they may be entitled to the deduction whether, they are passive, or active, within. The business so that's pretty cool now let's discuss some of the limitations, of this deduction the one minute a deduction, is limited to, 20%. Of, the, lesser of qualified. Business income or. Taxable. Income, after reductions, for any net capital gains short, term or long term but.
Before. The, 199, a deduction, is taken into consideration, so. I know I know it's confusing but just take take your time to study that and wrap your head around it we're gonna look at one quick example here right, now so you guys can understand what, we're talking about it turns out taxable, income this piece right here remember, your taxable income is generally, your adjusted. Gross income, minus your. Standard deduction or, itemized. Deduction, if you itemize so your AGI minus. Standard deduction or your itemized deduction equals, your taxable, income okay. Let's look at a calculation, example, and let's see if we can make more sense of all this stuff because it's very confusing when you read it out loud you have to I had to read this several times to, follow it okay we have our calculator on screen now now let's look at an example and put these rules in the place so, we have a taxpayer, married filing joint, with. A. $100,000. Of qualified, business income from their business so, that's $100,000. Right that's $100,000, of income right there so we're gonna add 100,000, then, this same person they also have. $100,000. In long-term capital gains so, we're gonna add another $100,000. Here so. Now their total income before. Deductions. Is 200,000, right so. Now they're, they, have $30,000. Of tax deductions let's, just pretend these are their itemized, deductions, so now from. This 200,000, we subtract 30,000, from that. So. This means their net taxable. Income in this example would be one hundred and seventy, thousand, dollars but, now we have to apply these set, of rules or this logic, in order to calculate our deduction, okay, so it's 20 percent of the lesser of either qualified, business income or. Taxable. Income after reduction for any net capital gains we when we first come down here we see that their qualified, business income is, $100,000. Correct so, we know what that is but, now we have to look, at it from the other angle so we know our net taxable, income is one hundred and seventy thousand dollars because. We just added all this stuff up and then took out the itemized deductions, so. But now we have to back, out long. Term capital, gain remember it's taxable, income after reduction. For. Any net capital gains so we, take one hundred and seventy thousand, as we have here and we subtract, out the, long-term capital gains of 100,000. So. Now this, is our net taxable, income after, capital. Gains have been taken to account so, now which number, is smaller the, hundred thousand, of qbi or this, seventy thousand well, if you have passed math class which I hope you did you know that seventy, thousand, dollars is the right number, so the 70 thousand dollars is smaller so, that is the number that, we have to use in order, to find out what our qualified. Business, income deduction, is so, we're gonna take seventy. Thousand, dollars and. We're gonna multiply that by twenty percent because, that's the max deduction, we can receive so. Our qpi deduction, in this example, the. Result is fourteen, thousand, dollars so, this taxpayer, can reduce their their, taxable, income by, fourteen, thousand, dollars and we're you're gonna see that show up and because I've looked at the 2018, draft forms it's, gonna be on line nine if I remember correctly and I'll put it up here on screen and it's, going to reduce, your taxable, income even further I know I went over that example. Pretty fast but, like I said you're, gonna have this handout you can download for free and you can re-watch this video anytime so, take time to study it just that's the best you're gonna learn this stuff is to, actually sit through it and work through problems for yourself if you really are hoping, to understand, it because I don't think there's another way it's like it's like math class you really do have to work problems, out to understand, how this all works. So. What businesses, and taxpayers qualify. For the $1.99 a deduction, so we know that if you're a partnership, you're. Eligible if you're an S corporation, you're. Eligible now remember I said corporations. Are not able, to take this deduction but.
I Met C corporations, if you're, an S corporation, which. Means you're a pass-through, entity then, you you are still allowed to take the deduction if you're a sole proprietor, so like if you're let's say you have a lawn mowing business and you just work for yourself, well then you would your, business would also fall under this category so, you you would be eligible to take it and or. If you're an AG cooperative, you can take it other, eligible, taxpayers include individuals, trust. And the states on that, note now let's talk about the people who don't get to take it remember C corporations, do not qualify if, you are an employee, I have to make this very clear because a lot of people asked about this you, do not get the deduction to qualify for this deduction you have to have ownership interest within a business. So. What is a qualified, trade or business that is the question you should be asking yourself so, every business is a qualified, trade or business as defined, under section, 199, a with. The exceptions, being the trade. Or business of performing, services as an employee, sorry, employees, you get screwed and any. A specified, service trade or business, sorry service businesses, they, don't like you either before. We get into all of that let's talk about some income limitations, if your, filing status is single you. Get the full twenty percent deduction if your, taxable income is less than one, hundred and fifty to seven thousand, five, hundred if you're, married filing joint, you get the full twenty percent deduction as, long as your taxable. Income is less than three hundred and fifteen thousand, and once, you go above these amounts then, the deduction starts. To phase out for you so, no, deduction, once your income exceeds, if your single two hundred and seven thousand five hundred so. Which is a fifty thousand dollar spread right here that's what this is is a fifty thousand dollar spread and now if you're married you have more room here it's, actually a hundred thousand dollar spread so you're, as long as you're within, this range you can still take the deduction I want to make a very clear here that once.
You're If you're in a specified, service business, which we're about to cover here in just a second then. Once. Your income is above this then. You can no longer take. Any deduction. For one ninety, nine eight so once you're over these amounts you're out of luck if you're, in a certain specified, service trader, business but. If you're if you're like a manufacturing, company or another kind of business, that, is not, a specified. Service trader business you, have some more leeway you have some more options even, if your income is above, these. Amounts, which, is pretty cool so, then there's another test it's called the income limitation, phase in and so, that they look at the limit. Is the greater of 50 percent of your w-2 wages or. 25. Percent of your w-2 wages plus, two, and a half percent of your on adjusted basis. This. I'm going to tell you is not going to make a lot of sense right now until, we actually look, at a full-on, examples. Of this in. The next part, of this series in. Excel that we're gonna do in the next video I'm, gonna let you guys read this part for yourself on screen I don't want to read every single line Adam - you guys - for sake of time but I'm. Basically here I'm explaining how there are exceptions, for deductions. If you're in a specified service, trade or business so go ahead and just take. Your time and read this for yourself it'll make a lot of sense now let's get into the important part of what if the heck is a specified, service business, and the. Acronym for these things guys there's two acronyms, out there and the. Acronyms are SS b or SS. T, b and i know what, you're thinking I know what you're thinking when I said that is you're thinking of STD. And it, sounds just like it well, specified. Service businesses, are SSB or SS TB, or bad. So if you if you have if you work within one, of these types of businesses they. Don't it this, deduction, is, not, your, friend it's not as friendly to you so, just like STD. Is bad if your, business is an SS B it's, bad because. There's limitations, to the deduction, you can take and that's kind of how I remember, some of this stuff I know, it's crazy but it helps it, this stuff is these. New rules or, bunkers. Now. Let's look at some examples, of these SS B's the specified, service trade or business if your business is in the field of law and you, are engaged. In the performance of legal services by attorneys, paralegals and other similar professionals, who, serve in a legal service capacity yeren, SSB, if you're, an accountant, hey that includes me.
Contents. Auditors enrolled agents and other similar professions are, considered. Service, types of businesses doctors. Pharmacists. Nurses those, are considered services performing. Arts actors, singers directors, for all of you out there who are aspiring to be famous youtubers, and make a living off of youtube our extra money from YouTube unfortunately. YouTube, based, on my, interpretation and this, definition would. Fall off I would. Fall under this specified, service trader business category, so, your, deduction, might be limited, so I'm gonna stop reading, this list you guys can read it in your own time read, through it there's a lot of different professions, that, would fall under this category as, specified, service trader business so, now that we've looked at some examples of that there's one more thing now that will make a lot more sense let's, go back up to this income. Limitation, thing which we were talking about up here so. Whether. Or not you're. In a specified. Service trader business or a different. Kind of business altogether the. Good part is as as long as your income is below, these. Amounts which, this is gonna be true for most people. So most people are gonna be able to get the full 20 percent deduction so, if you're single and your incomes under this and as, long as your if you're married filing joint, as long as your income is under this amount you're, gonna be able to get the full $1.99. A deduction, whether, you're in a service business or not, so that's the good news once your income, goes above these amounts if you're in one of those specified, service trader. Businesses, which we discussed, down here that's. Where your deduction, completely, stops you get no chance. To do the abduction after that but. If you're in a business that is not one, of these things right here if you're like a manufacturing, company then. There's some other tests, you can run under these income.
Love Other limit income, limitation, rules that might allow you to actually get a deduction, so. I hope that makes sense I know it's confusing but, it's gonna make a lot more sense in the next part of this series we're. Going over the theory here ladies and gentlemen so that when, we do do the calculations, the, numbers will make more sense because, if you don't know all of this stuff all of these rules the, calculations. Will make absolutely. No sense so that's why we're covering this first in the handout take the time or pause the video here to read more about specified, service trade or businesses I'm not going to read all this to you for sake of time alright, I think I'm gonna go ahead and stop the video right here I know I went over a lot of information very quickly remember. To download this handout for free it'll. Make a lot more sense I think you're gonna get a lot from just rereading, the handout watch, this video again and go, through this calculation example. Up here, that we covered just. To whet, your appetite, and then. Next, week in next week's video I'm gonna publish, five. Full. On calculation. Examples, so, it's very important, you study up on this think of this as a class your. Homework ladies and gentlemen so read up on this download, the spreadsheet and, study, this and then I'll see you again in next week's video if you, liked the video drop, a like make, sure to share this information with a friend especially a friend who's thinking, about starting to their own business or a, friend already has their own business I'm sure they would find this information helpful, because, this, is a new frontier attacks and CPAs. And professionals, are trying to learn this as well as business owners and if. You're new to money in life TV welcome, on, this channel our goal is to help you become fiscally, fit and, we do that by teaching finances. Investing. Taxes. And more on a regular, basis, so be sure to subscribe so you do not miss any of our future uploads, if, there was ever a year to find an accountant, if you're a business owner this, would probably be the year to do it if, you're if you have a complex tax situation, is to find out I see if seek out a CPA in your area who knows this stuff very well alright. Ladies and gentlemen I really look forward to reading your comments, I hope, you have a great week and I will see you in the next part of this series and then I think it's gonna start to make way more sense but. Until then, do your homework don't, let me down and I'll see you in the next one love you all peace. You.