If you’re a business owner with a pass-through entity, there’s good news for you: The new tax law will give you some financial relief in the coming years. Of course, not everybody is happy about the change, according to experienced Certified Public Accountant (CPA) Stephen Varanko. Let’s take a look at one of the new tax law’s most controversial components -- the introduction of a deduction for all pass-through entities’ income.
This deduction, known as Section 199A, reduces taxes for taxpayers receiving income through pass-through business ventures. These ventures are basically companies that aren’t subject to our nation’s corporate income tax. It is anticipated that this deduction will decrease the federal government’s revenue by more than $400 billion during the next decade.
What’s so great about this deduction is that it delivers tax relief to many American businesses and places small businesses on a more level playing ground with “C” corporations. However, opponents of the new deduction claim that it predominately benefits the wealthiest households and arbitrarily favors pass-through business venture income over alternative income sources.
The pass-through income deduction essentially enables you to exclude as much as 20 percent of your pass-through income from income tax at the federal level. Keep in mind, though, that this deduction comes with several limits in an effort to prevent abuse. These limits are based on factors such as your business’s economic sector, the amount of wages your business pays, and your business property’s original cost. However, the limits apply only to the upper-income taxpayer.
The new pass-through income deduction is no doubt complicated and thus confusing for many business owners, according to Stephen Varanko. Fortunately, a CPA can help you to sort out what the new deduction means for you and your pass-through entity in the tax years ahead.