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May 2019  Volume 17, Number 5        

New Tax Deduction for Small Business Owners

Personal deductions have been the name of the game for many Americans as a way to reduce their tax liability.

The Tax Cuts and Jobs Act changed that – and in the process offered new opportunity for some businesses to reduce taxable income by up to 20 percent.

Congress enacted the Tax Cuts and Jobs Act in late December 2017. The new law immediately reduced rates and many employees saw their take-home pay increase. What many taxpayers weren't expecting was smaller refunds at the end of the tax year.

Another surprise is the standard tax deduction change made many tax reduction strategies irrelevant. The new tax law increased the standard deduction to $12,200 for individuals and $24,400 for married couples filing jointly. The higher standard deduction eliminates the need to itemize for many tax payers.

There still is one reliable way to reduce personal taxes. Taxpayers can still contribute tax-free dollars to their qualified retirement plan, such as a 401(k) or IRA. For small business owners, there's an additional incentive to contribute to their own retirement plan: the qualified business income (QBI) deduction (Sec. 199A). The QBI allows business owners of pass-through entities to reduce their taxable income by up to 20 percent of the entity's profits. However, owners of specified service trades or businesses do not benefit from this deduction if their taxable income exceeds a certain threshold.

A "specified service trade or business" is defined as any business involving the performance of services in health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services. It includes any trade or business where the principal asset is the reputation or skill of one or more of its employees or owners, or businesses that consist of investing and investment management, trading or dealing in securities, partnership interests, or commodities.

The QBI deduction rules are very complex, so be sure to work with a broker to see if it's a good option for you.

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In this issue:

This Just In ... The Human (or Robo) Advantage in Financial Planning

What a Single Payer Health Care System Could Mean to You and Your Employees

Ways to Make Childcare Costs a Little More Affordable

Sorting Out the Alphabet Soup of Low-Cost Health Benefit Plans

New Tax Deduction for Small Business Owners



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