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Pass-Thru Income Deduction

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Re: Pass-Thru Income Deduction

#21

Post by NickM »

Stratoscope wrote: post #14

I'm no expert, but from what I've seen, many people who are reading this should not get their hopes up. If you're a software developer operating either as a sole proprietorship or as an S corporation, I don't think you'll get the deduction. (If you have an LLC, that doesn't mean anything to the IRS; it's treated either as a "disregarded entity", i.e. a sole proprietorship, or as an S or C corp if you've taken that el…

My understanding though is that these restrictions only apply to high earners (>157.5k single, >315k married), and even then the restrictions phase in gradually until you hit an even higher income. I would bet that most software developers have low enough incomes to qualify for some or all of the deduction, regardless of whether developers and IT professionals fall under the restricted categories. I could be wrong, so don't take my word for it, but I wouldn't give up hope just yet unless someone can elaborate on why this isn't the case.

Re: Pass-Thru Income Deduction

#22

Post by zrail »

Stratoscope wrote: post #14

I'm no expert, but from what I've seen, many people who are reading this should not get their hopes up. If you're a software developer operating either as a sole proprietorship or as an S corporation, I don't think you'll get the deduction. (If you have an LLC, that doesn't mean anything to the IRS; it's treated either as a "disregarded entity", i.e. a sole proprietorship, or as an S or C corp if you've taken that el…

If your taxable income (i.e. income after above- and below-the-line deductions including the standard deduction, but before this deduction) is less than the threshold amount ($315,000 for married filing jointly, half that for single) then the specified trade or business aspect doesn't apply.

From the bill text: https://www.congress.gov/bill/115th-congress/house-bill/1/te...?

“(3) EXCEPTION FOR SPECIFIED SERVICE BUSINESSES BASED ON TAXPAYER'S INCOME.—

“(A) IN GENERAL.—If, for any taxable year, the taxable income of any taxpayer is less than the sum of the threshold amount plus $50,000 ($100,000 in the case of a joint return), then—

“(i) any specified service trade or business of the taxpayer shall not fail to be treated as a qualified trade or business due to paragraph (1)(A)

Re: Pass-Thru Income Deduction

#23

Post by misiti3780 »

nodejsbangalore wrote: post #7
perseusprime11 wrote: post #3

Should everyone be thinking of becoming a pass through business? Person Inc. works for Big Business Inc. Everybody pays 20% tax and we are all happy.

I might be wrong but I think that tax rate is not 20%. I think the deduction is 20%. If I understand it correctly then what it means is that if you have earned $100k then you are taxed only on $80k and 20% (20K in this case) is your deduction. Can someone confirm/deny it.

but not if you are a software consulting apparently: https://news.ycombinator.com/item?id=15973178

Re: Pass-Thru Income Deduction

#24

Post by zrail »

NickM wrote: post #21
Stratoscope wrote: post #14

I'm no expert, but from what I've seen, many people who are reading this should not get their hopes up. If you're a software developer operating either as a sole proprietorship or as an S corporation, I don't think you'll get the deduction. (If you have an LLC, that doesn't mean anything to the IRS; it's treated either as a "disregarded entity", i.e. a sole proprietorship, or as an S or C corp if you've taken that el…

My understanding though is that these restrictions only apply to high earners (>157.5k single, >315k married), and even then the restrictions phase in gradually until you hit an even higher income. I would bet that most software developers have low enough incomes to qualify for some or all of the deduction, regardless of whether developers and IT professionals fall under the restricted categories. I could be wrong, s…

Yep. Keep in mind that those numbers are taxable income not gross income. That means all deductions (including the standard deduction) except the 199A deduction itself apply before the 199A deduction. Even if you make a huge amount of gross income you can get below that threshold fairly easily by, for example, setting up a 401(k) and a defined benefit pension plan.

Re: Pass-Thru Income Deduction

#25

Post by spikels »

Stratoscope wrote: post #14

I'm no expert, but from what I've seen, many people who are reading this should not get their hopes up. If you're a software developer operating either as a sole proprietorship or as an S corporation, I don't think you'll get the deduction. (If you have an LLC, that doesn't mean anything to the IRS; it's treated either as a "disregarded entity", i.e. a sole proprietorship, or as an S or C corp if you've taken that el…

According to the article you WILL get the deduction but it will begin to phase out as your taxable income exceeds $315,000 for married individuals filing jointly or $157,500 for individuals

Re: Pass-Thru Income Deduction

#26

Post by Justin_K »

tunesmith wrote: post #16

Does this change the incentives on how S-Corps structure salary versus distribution? Sometimes people keep salary low (but still "reasonable") and distributions high to limit FICA. Other times people inflate their salary (and keep distributions low) to be able to contribute more to 401k profit-matches and social security. Since it's a pass-through, it seems like taxable income might be roughly the same either way, so…

Really interested in this also. Do share a link if you come across it. So far I have seen conflicting info on the 70/30 rule.

Re: Pass-Thru Income Deduction

#27

Post by spikels »

perseusprime11 wrote: post #3

Should everyone be thinking of becoming a pass through business? Person Inc. works for Big Business Inc. Everybody pays 20% tax and we are all happy.

If you are not an W-2 employee and your business is not incorporated, by default you ARE running your business as a pass thru entity.

BTW - There is no 20% tax. There is a 20% deduction for some pass-thru income.

Re: Pass-Thru Income Deduction

#28

Post by spikels »

misiti3780 wrote: post #23
nodejsbangalore wrote: post #7

Earlier quoted context omitted.

I might be wrong but I think that tax rate is not 20%. I think the deduction is 20%. If I understand it correctly then what it means is that if you have earned $100k then you are taxed only on $80k and 20% (20K in this case) is your deduction. Can someone confirm/deny it.

but not if you are a software consulting apparently: https://news.ycombinator.com/item?id=15973178

and your taxable income exceeds $315,000 for married individuals filing jointly or $157,500 for individuals. The 20% deduction starts phasing out at those levels.

Re: Pass-Thru Income Deduction

#29

Post by Bedon292 »

o_nate wrote: post #5
perseusprime11 wrote: post #3

Should everyone be thinking of becoming a pass through business? Person Inc. works for Big Business Inc. Everybody pays 20% tax and we are all happy.

This handy guide lays out some ways that the legislators in their wisdom have sought to curb this understandable impulse. E.g. the allowable deduction is proportional to regular wages paid by the pass-thru business. So you can only take deductions on income of Person Inc if Person Inc also pays wages that are taxed at regular rates. Provisions like that will keep the tax accountants busy.

I believe you are addressing #8 on the link. This only applies to high income earners. So if you are under those thresholds you don't need to pay any additional employees.

Re: Pass-Thru Income Deduction

#30

Post by spikels »

tptacek wrote: post #13
DaiPlusPlus wrote: post #11

Earlier quoted context omitted.

I don’t think certain benefits like healthcare and 401(k) accounts can be conferred that way if you’re W-2, but if you’re 1099 I see absolutely no reason not to.

If you're 1099 you're already a pass-thru business.

Unless you set up your business up as a C-corp. Rarely the case for individual consultants because it provides limited benefits and lots of costs.
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