The pass-through deduction

We are approaching tax season and we know that this fact doesn’t always evoke positive thoughts.

In this case, though, we would like to remind you of the existence of the “pass-through deduction”.

Let’s explain what it means.

Small businesses (partnerships or limited liability companies) do not pay a direct corporate tax — they “pass-through” their gains and losses to the individual members of the partnership or LLC.

Thanks to the latest tax reform, all pass-through entities will benefit from a new 20% deduction (valid until 2025).

This deduction will contribute to lower income tax rate substantially.

Please consider that when the full deduction is applicable, it reduces the top effective tax rate to 29.6%.

In the case of taxpayers with incomes above certain thresholds:

– the 20% deduction is limited to the greater of 50% of the W-2 wages paid by the business

or

– 25% of the W-2 wages paid by the business, plus 2.5% of the unadjusted basis, immediately after acquisition, of depreciable property (structures, not land).

The 20% pass-through deduction begins to phase-out beginning at $315,000 (for married couples who file jointly).

This new deduction is very positive for small businesses in general. Investors and landlords, just as an example, often do business via pass-through entities and will, therefore, benefit from this deduction.

Yes, tax season is above us, so our advice is: make sure to collaborate with the right CPA.

It’s essential to create a clear and honest relationship with someone who will be able to offer expertise as well as listen to your needs and provide tailor-made solutions.

Clear communication and mutual trust will help both parts to work effectively and find solutions in the client’s interest.

Our offices are at your disposal. Do not hesitate to contact us.