If you’re a small business owner in Honolulu, you probably know how confusing tax planning can be. This is especially true when it comes to new regulations like the pass-through deduction, which offers certain business entities a 20% tax cut on qualified income. Read on for more information on this new tax law and how it could potentially affect your business.

How the Pass-Through Deduction Was Created

From 2018 to 2025 small business owners will be able to deduct 20% of their qualified business income on their tax returns. This deduction was enacted to match those afforded to businesses not considered pass-through entities, such as corporations.

Corporations and other types of business formations are taxed differently. For instance, with a corporation taxes must be paid by the corporation itself and then again by the shareholders when receiving dividends. Conversely, most small business owners pay taxes on their enterprise through their personal tax return.

Who Is Eligible

This act covers virtually any business formation other than corporations. This includes partnerships, S corporations, sole proprietors, and businesses that own interest in other pass-through entity.

In terms of how qualified trades or businesses are defined, all businesses except those considered specified service businesses or employees working on behalf of a qualified business are eligible for the deduction. A specified service business is one that offers services like accounting, health care, law, financial services, among many others. If you have questions, a tax planning professional can help determine your eligibility.

Limitations

Even if a business is considered qualified there are still limitations on deductions. For instance, the deduction can only match half of the reported W-2 wages or the total of 25% of W-2 wages plus 2.5% of the business owner’s share of qualified property (i.e., property that is owned by the business and used for business purposes). Deductions are also limited based on taxable income, and phaseouts begin at $157,500 for single filers and $315,000 for couples.

This recent change to the tax code illustrates how important it is for small business owners to have reliable tax planning help. That’s exactly what the CPAs at Tudor Wilson & Associates CPAs LLC offer their clients in Honolulu. Whether you need help with deductions related to your business enterprise or have questions about succession planning, their team can help you determine the best course of action. They also offer forensic accounting service, which can help you when faced with legal issues. Schedule a consultation with an accountant today by calling (808) 592-2000. You can also visit them online for a complete list of tax planning services.