20% Business Pass-Through Deduction Opportunity Awaits, But It Is Already In Effect And Delay May Cost

Beginning in 2018 new Section 199A permits the owner of a non-C corporation business to deduct up to 20% of the owner's share of the company's qualified business income (QBI) from taxable income. For example, if an owner of an LLC earns $200,000 QBI from its business, then he or she may be able to deduct up to $40,000. Assuming that the owner is in a 30% tax bracket, the federal tax is reduced by $12,000.

There are special limitations on higher income owners tied to payroll and asset costs. One limitation is that the Section 199A deduction cannot exceed 50% of W-2 wages. But there are techniques to save a bundle by merely adjusting how profits are distributed. For example, assume an S corporation with one owner-shareholder has taxable income (before the deduction for the owner's compensation) of $900,000. If the owner takes $125,000 as employee compensation, the $775,000 balance of income is treated as a taxable distribution to the owner from the company. Under the rules of Sec. 199A, let's assume the owner may be entitled to the Sec. 199A deduction of $62,500. However, if the owner's salary is raised $125,000 to $250,000 (thereby lowering the shareholder's S corporation taxable...