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Tax Cuts and Jobs Act (TCJA)
The Tax Cuts and Jobs Act (TCJA) was passed in December of 2017 and is recognized as the largest U.S. tax reform in over 30 years. The changes resulting from this new tax reform took effect in the tax year of 2018.
What is QBI and Specified Service Besinesses?
- A new deduction introduced by the Tax Cuts and Jobs Act of 2017 is the Qualified Business Income (QBI) deduction. This is one of the biggest changes under this new tax law. Pass-through entities, such as owners of partnerships, LLCs, S-Corporations and sole proprietorships are entitled to take a deduction equal to 20% of the QBI earned from the business.
- Some businesses are excluded from QBI based upon what they do. These are called “specified service businesses” and include:
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Accounting
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Medical
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Law
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Financial services
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Athletics and performing arts, or
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Any trade or business where the principal asset is the reputation or skill of one or more of its employees
Owners of these types of businesses may still claim the full QBI deduction if their taxable income is below the lower threshold ($315,000 for joint filers), but they get no deduction completely if their taxable income is above the upper threshold ($415,000 for joint filers), regardless of the wages paid or the assets owned.
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The deduction is phased out ratably if taxable income is between the lower and upper thresholds.
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QBI does not include:
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Wages or guaranteed payments earned
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Capital gain or loss
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Investment income (e.g. interest, dividends, etc.)
After QBI is determined and calculated, 20% of the QBI can be deducted.
The deduction is phased out ratably if taxable income is between the lower and upper thresholds.
Am I Eligible?
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If your joint taxable income is under $315,000, you can take the full QBI deduction.
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If your joint taxable income is over $415,000, your deduction will depend on the wages paid by your business or the assets owned by the business.
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If your taxable income is between $315,000 and $415,000, the deduction is between the full amount and the limited amount based upon wages and/or assets.
Meals & Entertainment Expenses
What Qualifies an Expense as a "Business Expense?
Not changed by the TCJA, an expense is only deductible as a business expense if it is an ordinary and necessary expense incurred in carrying on any trade or business.
Regarding meals, the law is very clear that there had to be a legitimate business discussion taking place and that the taxpayer or an employee of the taxpayer had to be present at the meal. The other participants in the meal could be a current or potential customer, client, consultant, or similar business contact. If these qualifications were met, and proper documentation was maintained, the meal was 50% deductible. We now know that we can continue to treat these meals as we have in the past, as long as they are not “lavish or extravagant under the circumstances.”