As illustrated in a previous post, the tax law changes of 2018 brought along a new benefit to pass through entities: The QBI Deduction, which is a deduction up to 20% of qualified business income.
This Section, though, is full of complexities, as it includes many limitations and multiple calculations.
The biggest limitation was if your business fell into the category of a specified service business, which includes the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, investing and investment management, trading, dealing in certain assets or any trade or business where the principal asset is the reputation or skill of one or more of its employees.
If your business is in this category and if your household income exceeds $315,000 for married filers or $157,500 for single filers, it is clear that the QBI deduction for business income will be phased out and ultimately eliminated once your household income exceeds the income thresholds.
What was not clear was how this would impact the real estate you own and that your qualified business rents from.
Unfortunately, the IRS has since issued additional guidance which clearly states that for those with qualified service businesses that have commonly controlled rental entities, the business income from the rental entity is also limited or excluded (depending on household income) from the QBI deduction.
This is certainly a bummer for many qualified businesses that also have commonly controlled rental entities.
Although this may be a missed deduction for some, be sure to reach out to qualified advisors, like the Team at Abbott Pratt, who can work with you and your businesses to find other opportunities within the tax laws to position your business and family in the best possible way.