Eight months after Congress passed a sweeping tax reform, financial advisors and tax experts are still trying to break down the new policies, particularly those that impact small business owners.
While the corporate tax rate was slashed from 35 percent to 21 percent, the additional business income deduction of up to 20 percent introduced complex conditions that takes how a business is classified into consideration—sole proprietorship, partnership, Limited Liability Company (LLC), Single Member Limited Liability Company, C Corporation, Professional or Personal Service Corporation, or S Corporation. The new policy also implements special restrictions for “service-business owners” and businesses who rely on their reputation as a steady stream of income.
Now, the Treasury Department is clarifying conditions by outlining which types of businesses will be able to claim the new tax benefit, reports the Wall Street Journal. The final deliberation? Business owners whose taxable income is less than $315,000 for joint filers (and less than $157,500 for single filers) can claim the deduction; however, any business above that threshold, and is considered a “service business owner,” will see a phase-out over the next $100,000 of income regarding this specific tax break.
According to the Treasury Department, business owners can claim the tax benefit if they have gross receipts of $25 million or less and 10 percent of receipts are from a “specified service business.” Small business owners with gross receipts over $25 million, however, can only claim the benefit if up to 5 percent of the receipts are from a “specified service business.”
Where do real estate professionals stand? Real estate and insurance brokers are not included within the category of businesses restricted from obtaining the tax break. However, industry professionals should always consult a financial advisor to gauge eligibility on an individual basis.
The National Association of REALTORS® (NAR) believes the tax-break will largely benefit REALTORS®.
“Over the past several months, the National Association of REALTORS® has worked with the IRS and Treasury Department to ensure real estate professionals can benefit from the Section 199A 20 percent deduction for pass-through businesses,” said NAR President Elizabeth Mendenhall in a statement. “We were pleased with [the] announcement, and believe this new 20 percent deduction will have a significant, beneficial impact on real estate professionals and America’s small businesses. Specifically, we anticipate the deduction to become available to a wide range of real estate professionals, including those who are self-employed as well as those operating through partnerships, LLCs, and S corporations.
“This ruling is a victory for many of our 1.3 million members, those who represent all aspects of residential and commercial real estate,” Mendenhall said. “NAR continues to review all relevant information in the recently released proposed regulations on Section 199A, and will communicate with our members as new details emerge.”
This story has been updated.
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