{"id":23124,"date":"2024-01-08T16:40:19","date_gmt":"2024-01-08T16:40:19","guid":{"rendered":"https:\/\/www.anthonydidonato.net\/wordpress\/?p=23124"},"modified":"2024-01-08T16:40:20","modified_gmt":"2024-01-08T16:40:20","slug":"how-the-20-business-income-deduction-applies-to-you","status":"publish","type":"post","link":"http:\/\/www.anthonydidonato.net\/wordpress\/how-the-20-business-income-deduction-applies-to-you\/","title":{"rendered":"How the 20% Business Income Deduction Applies to You"},"content":{"rendered":"\n

Changes stemming from the Tax Cuts and Jobs Act of 2017 allow agents and brokers who earn income as independent contractors or from pass-through businesses to take a significant deduction on that income.<\/p>\n\n\n\n

One of the biggest wins for REALTORS\u00ae in last year\u2019s tax reform bill is the new 20 percent business income deduction, also known as Section 199A. Almost any self-employed person or owner of a pass-through business (such as an S corporation, limited liability company, or partnership) with eligible income, which the National Association of REALTORS\u00ae made sure includes commissions from real estate sales, can take 20 percent off the top after business expenses are taken out.<\/object><\/p>\n\n\n\n

Of course, there are limits. If you file as an individual, you\u2019re eligible up until your taxable income reaches $157,500. After that, your deduction phases out over the next $50,000, until you reach $207,000.  For couples filing jointly, the taxable income limit is $315,000, with a $100,000 phase-out until you reach $415,000. That applies to your combined income. So, your spouse\u2019s income can impact your eligibility.<\/p>\n\n\n\n

Real estate professionals with incomes above those amounts also may be eligible for the deduction but, in this case, it\u2019s based on a formula that looks at wages paid and depreciable business property.<\/p>\n\n\n\n

What should you be doing to ensure you\u2019re positioned to get the most out of the deduction in your 2018 taxes, due next year in April? To find out, REALTOR\u00ae Magazine talked to Peter Baker, a certified public accountant and principal of Business Planning Group in Washington, D.C. Baker\u2019s practice specializes in real estate agents and brokers and he\u2019s already begun having conversations with his clients about what to do.<\/p>\n\n\n\n

Most real estate professionals are sales associates and are sole proprietors. Is there any tactical reason for them to restructure themselves into an LLC or S corporation to get a better deal under the deduction?<\/strong><\/p>\n\n\n\n

No. From the standpoint of 199A, a change in entity type is not necessary because sole proprietorship income qualifies for the deduction. Absent other reasons to change, they should keep filing as a sole proprietorship.  <\/p>\n\n\n\n

What if you\u2019re a broker or otherwise have pass-through income in addition to commissions earned?<\/strong><\/p>\n\n\n\n

The deduction is taken on an aggregate basis, so if you have pass-through income from other sources in addition to commissions, then you combine your qualified business income with any qualified business losses before you calculate your deduction. So, if you have $100,000 in net commission income and $50,000 in qualified losses from other sources, the 20 percent would come off the aggregate amount, or $50,000. That means your potential deduction would be $10,000.<\/p>\n\n\n\n

What pass-through activities would generate losses?<\/strong><\/p>\n\n\n\n

Many things do. It\u2019s not uncommon for brokerages to throw off losses today because of generous splits with sales associates. So, if you\u2019re a broker-owner who still sells, you might have losses from your brokerage operation while generating commissions earned from your own sales.<\/p>\n\n\n\n

What if you have investment rental property or you\u2019re involved in land or property development? Those can throw off losses, right?<\/strong><\/p>\n\n\n\n

These are most often operated in pass-throughs, but we\u2019re still waiting on final IRS rules. So, we don\u2019t know yet about how net rental income and losses will be treated. [Editor\u2019s note: NAR is working with the IRS to get clarification on that question.]<\/p>\n\n\n\n

The deduction is taken on your net qualified business income. There\u2019s no change to what counts as deductible business expenses, right?<\/strong><\/p>\n\n\n\n

With the exception of some new rules for depreciation and changes in deductibility for meals and entertainment, that is correct. You take out your expenses in much the same way. Did you travel to conventions? Did you buy a new car? Did you buy a computer? Did you buy office supplies?  <\/p>\n\n\n\n

Sales associates and brokers typically aren\u2019t wage or salary earners, so they don\u2019t get W-2 income and are required to pay estimated taxes quarterly. That means they\u2019ve already paid three quarterly estimates for the 2018 tax year even though rules aren\u2019t out on the new deduction, or on other changes in the tax law, for that matter. What\u2019s going to happen come April if their estimated payments are off?<\/strong><\/p>\n\n\n\n

Hopefully they\u2019ve been talking to their professional tax adviser or accountant for the previous quarters. There are two ways to approach estimated tax payments given the new environment. The taxpayer can apply what\u2019s known as the safe harbor approach. That\u2019s where they pay estimated taxes based on their prior year\u2019s tax liability. As long as they do that, even if they end up owing more tax come April 2019, they won\u2019t be penalized or face interest charges for underpayments. They\u2019ll just have to settle up the amount they owe. Of course, if their current sales volume is down from the previous year, that could be a painful way to do it, because they\u2019ll be basing their payments on higher income than they actually earn. So, the alternative is to forecast taxable income based on what they\u2019ve earned year-to-date, subtract business expenses, and look at their pipeline of likely sales to forecast their anticipated earnings for the remainder of the year. Then, they factor in the 20 percent deduction.<\/p>\n\n\n\n

If they don\u2019t take the safe harbor approach, are they liable for penalties and interest payments if they underpay their taxes?<\/strong><\/p>\n\n\n\n

Potentially, they would be. However, the IRS has a first-time penalty abatement process for taxpayers who, for the past three years, have paid and filed their taxes on time and haven\u2019t incurred any penalties. So, if they have a good three-year history, they would be eligible for a one-time waiver of penalties and interest payments if they underpay their taxes.<\/p>\n\n\n\n

You mentioned final rules aren\u2019t out yet. When can we expect them?<\/strong><\/p>\n\n\n\n

Hopefully, before the end of the year. The IRS will also be revising forms to reflect the new qualified business income deduction. That should also be coming out before the end of the year.<\/p>\n\n\n\n

\u00a9National Association of REALTORS\u00ae
Reprinted with permission<\/p>\n","protected":false},"excerpt":{"rendered":"

Changes stemming from the Tax Cuts and Jobs Act of 2017 allow agents and brokers who earn income as independent contractors or from pass-through businesses to take a significant deduction on that income. One of the biggest wins for REALTORS\u00ae in last year\u2019s tax reform bill is the new 20 percent business income deduction, also … <\/p>\n

Continue reading<\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[16,8],"tags":[5,32,4,9],"class_list":["post-23124","post","type-post","status-publish","format-standard","hentry","category-news","category-real-estate-tips","tag-anthony-didonato","tag-news","tag-real-estate","tag-tips","item-wrap"],"yoast_head":"\nHow the 20% Business Income Deduction Applies to You - Real Estate Agent and Sales in PA - Anthony DiDonato Broomall, Media, Delaware County and surrounding areas in Pennsylvania<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"http:\/\/www.anthonydidonato.net\/wordpress\/how-the-20-business-income-deduction-applies-to-you\/\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"admin\" \/>\n\t<meta name=\"twitter:label2\" content=\"Est. reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"5 minutes\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\\\/\\\/schema.org\",\"@graph\":[{\"@type\":\"Article\",\"@id\":\"http:\\\/\\\/www.anthonydidonato.net\\\/wordpress\\\/how-the-20-business-income-deduction-applies-to-you\\\/#article\",\"isPartOf\":{\"@id\":\"http:\\\/\\\/www.anthonydidonato.net\\\/wordpress\\\/how-the-20-business-income-deduction-applies-to-you\\\/\"},\"author\":{\"name\":\"admin\",\"@id\":\"http:\\\/\\\/www.anthonydidonato.net\\\/wordpress\\\/#\\\/schema\\\/person\\\/964792b6994e8cc4cbddc36ad4824908\"},\"headline\":\"How the 20% Business Income Deduction Applies to You\",\"datePublished\":\"2024-01-08T16:40:19+00:00\",\"dateModified\":\"2024-01-08T16:40:20+00:00\",\"mainEntityOfPage\":{\"@id\":\"http:\\\/\\\/www.anthonydidonato.net\\\/wordpress\\\/how-the-20-business-income-deduction-applies-to-you\\\/\"},\"wordCount\":1021,\"publisher\":{\"@id\":\"http:\\\/\\\/www.anthonydidonato.net\\\/wordpress\\\/#\\\/schema\\\/person\\\/964792b6994e8cc4cbddc36ad4824908\"},\"keywords\":[\"Anthony DiDonato\",\"News\",\"Real Estate\",\"tips\"],\"articleSection\":[\"News\",\"Real Estate Tips\"],\"inLanguage\":\"en-US\"},{\"@type\":\"WebPage\",\"@id\":\"http:\\\/\\\/www.anthonydidonato.net\\\/wordpress\\\/how-the-20-business-income-deduction-applies-to-you\\\/\",\"url\":\"http:\\\/\\\/www.anthonydidonato.net\\\/wordpress\\\/how-the-20-business-income-deduction-applies-to-you\\\/\",\"name\":\"How the 20% Business Income Deduction Applies to You - 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