Maximizing Your Deduction

Ryan McDonell Tax Manager, CPA

17 December 2018

If you’ve had any tax discussions or read any tax articles over the past year, chances are you’ve heard about the new deduction – and for good reason! The deduction under section 199A of the code, introduced by the recent tax reform legislation, provides a deduction for sole proprietors and passthrough owners to compete with the (also) new low C corporation tax rate.

Generally, the provision allows a deduction of up to of qualified business income (QBI) from a qualifying trade or business.  Subject to certain taxable income thresholds, the deduction may be limited based on the W-2 wages expense or the cost of qualifying fixed assets of the trade or business. Certain types of trades or businesses, such as doctors, lawyers, and accountants, miss out on this deduction entirely if the taxpayer’s taxable income is high enough.

The 199A proposed regulations, issued this past summer, give practitioners and taxpayers more detail about the deduction and options for tax planning.  Important for dealerships: operating entities and self-rental real estate entities may be combined in order to maximize the deduction. Commonly controlled entities that operate similar lines of business, or rely on one another, may also be aggregated to provide a greater deduction.

With the end of 2018 approaching, there are some last-minute techniques taxpayers may be able to take advantage of in order to maximize the deduction.

The W-2 wages and fixed assets limitations of the deduction take effect once a taxpayer’s taxable income exceeds $315,000 if filing a joint return ($157,500 for others). If your taxable income is above this threshold – but within reach – you may want to take actions to reduce your taxable income. Some techniques that can help you accomplish this include increasing contributions to defined contribution plans, increasing certain types of charitable contributions, or selling poorly performing investments which may offset your capital gains.  There are also techniques that may help you increase your limitation factor, such as by paying employees increased wages, or by making capital investments in fixed assets before year-end. Also, revisit your rental company’s rental agreement to determine if the amount of rent paid is both appropriate and beneficial in context of the deduction.  If, as with many dealerships, the limitation is a non-issue because of the large amount of wages already paid by the company, consider shifting taxable income to maximize your deduction. Accelerating revenues into the end of 2018 may grant you a greater deduction while also increasing
your basis in the dealership. Forgoing year-end bonuses and allowing the income to flow through to your individual return on Schedule K-1 will also increase your deduction, since income received as wages is otherwise not eligible for the deduction.

Ultimately, each taxpayer’s deduction will have different nuances and hurdles to jump over. This new deduction was put in place to truly decrease taxes for sole proprietors and passthrough owners. Contact us to review your particular situation and to see if there are any techniques available to increase your deduction.

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