One of the key promises during President Trump’s campaign was to lower taxes for businesses from 35 percent to 15 percent and eliminate the corporate alternative minimum tax. The final version of the tax bill did eliminate the corporate alternative minimum tax, and lowered the tax for corporations to 21 percent in 2018. Furthermore, businesses organized as “pass-throughs” could get taxed at a less than 30 percent rate.
Taxes are never simple – despite the promise to simplify the tax code
Pass-through businesses are your LLCs, partnerships, S corporation, and sole proprietorships, in which the entity is not subject to income tax. Owners are taxed individually on the income, calculating tax on their share of the profits and losses. Because these business owners were at the mercy of their individual tax rates, some business owners could be taxed as much as 39.6 percent, not including the phase out of itemized deductions for high income earners.
In the finalized bill, pass-through businesses receive a 20 percent deduction of their qualified business income. Because taxes are never simple—despite the promise to simplify the tax code—the deduction is actually the lesser of: 20 percent of the taxpayer’s “qualified business income” or the greater of: 50 percent of the W-2 wages with respect to the business, or 25 percent of the W-2 wages with respect to the business plus 2.5 percent of the unadjusted basis of all qualified property.
OK, you want this in English. Qualified business income is income less ordinary deductions that you earn from a pass-through business, such as an LLC, sole-proprietorship, S corporation, or partnership. This does not include wages you earn as an employee. Let’s say you have an LLC (not a “specified service” trade or business), and your share of the qualified business income is $500,000. Multiply that by 20 percent and you get a deduction of $100,000. Woo hoo! Not so fast. There are limitations on the calculation that were added to prevent abuse of the rules.
How does this work? Let’s look at the example of your LLC of which you only own 40 percent. The company produced $1.25 million in ordinary income. The company paid W-2 wages of $455,000 and holds $200,000 in property. Your allocation of the wages is $182,000 and 50 percent of that is $91,000. One more calculation: 25 percent of the W-2 wages with respect to the business plus 2.5 percent of the unadjusted basis of all qualified property—in our example, this comes to $47,500 ($45,500 + $2,000). You’ve got two numbers: $91,000 and $47,500. The greater of the two is $91,000. This is your income limitation. So, your deduction on your $500,000 qualified business income is now $91,000 versus the simple 20 percent. Mindboggling, isn’t it? And this example was highly simplified for your convenience.
Now, not every LLC is making $1.25 million. Lots of small businesses make around $125,000 a year. There is an exception for you! If your taxable income is less than $157,500 or $315,000 for married filing jointly, you should be able to ignore the W-2 income limitations.
To make things more complicated if you are part of a “specified service” trade or business you will be faced with a phase out.
Wait, what? Yes, “Any trade or business involving the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees.” Will be deemed to be a “specified Service”.
This means if your income is above $207,500 for individuals and $415,000 for joint filers you will not be eligible for the deduction. Welcome to simpler taxes.
William G. Lako, Jr., CFP®, is a principal at Henssler Financial, a financial advisory and wealth management firm that has been delivering comprehensive financial solutions to its individual, corporate, and institutional clients for 30 years. Mr. Lako is a CERTIFIED FINANCIAL PLANNER™ professional.
Hannity: Trump's Tax Plan Will Create Millions of Jobs
Speaking during his opening monologue in ‘Hannity’ Wednesday night, Sean praised President Trump’s tax plan to cut taxes across the board and unleash the American economy, saying the new policies would create millions of jobs for the forgotten men and women of America.
“The President is following through on what he promised you on the campaign trail,” said Sean. “If President Trump’s plan is approved all of these companies will have billions of dollars, if not more, of extra money. They’re not going to put it in their bank accounts. […] They’re going to invest capital, manufacturing centers, and factories that will create jobs for the millions of forgotten men and women in this country.”
“That’s what we need, that’s what we want, that’s what many of you voted for,” he added. “Everything that the President is proposing is designed to help grow the economy… In many ways, it’s a lot like what President did in the 1980s.”
“Democrats and the mainstream left, establishment media, they’re not telling you that under President Obama 13 million more Americans were on food stamps, 8 million more Americans were put in poverty, 95 million Americans were out of the labor force, the lowest labor participation rates since the 1970s,” said Hannity.
“My advice to the GOP is very simple: Stay the course, follow the Reagan-Kennedy model, and stick to the plan the President is proposing,” he added.
Watch Sean’s opening monologue above.
FAT CAT: Hypocrite Obama Raking In $400,000 Per Wall Street Speech
Former President Barack Obama is raking in big bucks by delivering speeches to major Wall Street investment firms he once smeared as “fat cats,” earning upwards of $400,000 per speech according to a new report from Bloomberg.
The two-term President, who routinely slammed big banks and Wall Street executives as “fat cats” who don’t “pay their fair share in taxes,” is now one of the highest paid speakers in the country, taking in almost half a million dollars per engagement.
Obama reportedly earned over $400,000 last month for a speech he gave to Northern Trust Corp; the same fee he will receive for addressing Cantor Fitzgerald LP later this week.
A spokesman for the President defended the left-wing politicians outrageous price, saying Obama’s “paid speeches in part have allowed President Obama to contribute $2 million to Chicago programs offering job training and employment opportunities to low-income youth.”
Barack Obama routinely slammed the financial services sector during both his 2008 and 2012 presidential campaigns, blasting “overpaid” bankers and “out of touch” Wall Street executives who were earning giant bonuses while average Americans were reeling under the “great recession.”
The former President has been busy since leaving the Oval Office, earning over $60 million for a joint book deal including himself and former First Lady Michelle Obama. Later this year, Obama will host a summit of world leaders in Chicago.