Subject to tax at individual rates up to 39.6% An individual taxpayer generally may deduct

TAX BULLETIN 2018-1: TAX REFORM SIGNED INTO LAW PASS-THROUGH ENTITY TAXES 2017 Law 2018 Law Subject to tax at individual rates up to 39.6% An individual taxpayer generally may deduct 20% of domestic qualified business income from a partnership, S corporation, or sole proprietorship? In the case of a taxpayer who has qualified business income from a partnership, S$ corporation or sole proprietorship, the amount of the deduction is limited to the greater of (i) 50% of the W-2 wages paid by business or (ii) sum of 25% of W-2 wages paid by business and 2.5% of business capital. This wage limitation (i) does not apply if taxpayer’s taxable income is less than $157,500 ($315,000 for joint return); (ii) applies fully if taxable income exceeds $207,500 ($415,000 for joint return); and (iii) applies proportionately if taxable income is between those two limits Top Rate: Pass-Through Entities (S-corporations, LLCs, LLPs and Partnerships) / Sole Proprietorships Trusts and estates that own business interests qualify for this deduction Deduction is a post-AGl item, even for taxpayers not itemizing deductions Subject to tax at individual rates up to 39.6% For “specified service business,” {i) the 20% deduction applies fully if taxpayer’s taxable income is less than $157,500 ($315,000 for joint return); (ii) there is no deduction if taxable income exceeds $207,500 Pass-Through Entities — ($415,000 for joint return); and (ii) there is Service Businesses a partial deduction if taxable income is between those two limits..* Service business includes accounting, law, consulting, investing, etc., but excludes engineering and architecture services OBSERVATIONS — PASS-THROUGH ENTITIES As originally proposed, the House and Senate took fundamentally different approaches to the taxation of pass- through entities (sole proprietorships, partnerships, LLCs, LLPs and S-corporations). While they differed from each other, they shared the goal of creating preferential treatment for certain pass-through business income. The Act largely took the Senate’s approach but adopted a few elements of the House’s approach. The Act approaches small business relief by permitting a non-itemized deduction of 20% of qualified business income; the remaining 80% would then be subject to normal tax rates. Therefore, the top tax rate for business income would be 29.6% (80% x 37% = 29.6%). The provision is riddled with a host of complex limitations. For taxpayers not in the top income tax bracket, the value of the deduction will depend on the marginal bracket that would otherwise be imposed on the income. Owners of service businesses (e.g., law, accounting and consulting, etc., but not engineering or architectural services) generally would be eligible for the 20% deduction unless taxable income exceeds $315,000 for married filing jointly ($157,500 for others). The benefit of the 20% deduction is phased out and fully eliminated over the HOUSE_OVERSIGHT_029442