Current Tax Law: Currently, owners of pass through entities, which include sole proprietors, S corporations, and partnerships, are required to report their allocable share of the business income on their individual income tax returns.
New Law: Since C corporations are getting a tax break in the Tax Act of 2017, both the House and Senate bills sought to level the playing field so pass through entities would not be disadvantaged. The resulting legislation will allow sole proprietors, shareholders of an S corporation, and partners of a partnership to claim a deduction against their allocable share of income from the pass through entity. Some specifics are as follows:
Additional limitation on personal-service providers. Certain personal-service providers (namely accountants, attorneys, physicians) are subject to a phase out of the deduction when their taxable income reaches $157,500 (single) or $315,000 (married filing jointly). The phase out is complete at $207,500 and $415,000, respectively. So these professionals’ ability to claim the deduction will be largely limited.
The good news for architects and engineers is they were specifically excluded from the definition of “personal-service providers” in the new law and therefore are not subject to the limitations imposed on personal-service providers. This is a big tax benefit to architects and engineers as they will only be subject to the bulleted provisions outlined above.
Current Tax Law: The current tax law allows taxpayers to claim a deduction equal to 9% of the lesser of the taxpayer’s taxable or qualified production activities income subject to a limitation of 50% of W-2 wages paid by the taxpayer in a calendar year that are attributed to domestic production gross receipts.
New Law: The Tax Act of 2017 repeals Section 199. According to the Unified Tax Reform Framework, the Domestic Production Activity Deduction would no longer be necessary after the tax rate reduction and other tax-reducing initiatives take effect.
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