How to save 20 percent on your taxes – maybe

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Small business owners may be able to save on their taxes for 2018, but it’s complicated.

The provision, also known as the “pass-through provision” but formally known as the Qualified Business Income Deduction or Section 199A, was part of the Tax Cuts and Jobs Act signed in December 2017.

“Where they actually got to the heart of small business is with this right here,” said Dallas Millington, certified public accountant (CPA) at Millington Zwygart CPAs, a Meridian-based accounting firm.

The purpose of the provision was to give small business a tax reduction comparable to the corporate tax rate, which was reduced from 34 percent to 21 percent, said Mike Lindstrom, partner with Eide Bailly LLP, a Boise-based accounting firm, and chair of the federal and state tax committee for the Idaho Society of CPAs. As many as 60 percent of his company’s clients are likely to be eligible, he said.

What it boils down to is people in certain professions, within certain income limits, may be able to take up to a 20 percent deduction on their income. Aside from paying less taxes, they could be placed in a lower tax bracket. And because the Legislature voted in February to conform with the federal tax code, the deduction applies to both federal and state taxes.

What makes it complicated is the Internal Revenue Service hasn’t defined some of the rules, so it isn’t clear what some provisions are.

“The biggest challenge is the regulations have not been released yet, just the bill,” said Lindstrom, who added that the regulations might not be available for 2018 taxes. “People will be interpreting the law, and then all the fun begins.” In addition, there is no case law yet to help guide accountants, he said.

Moreover, there can be up to a 20 percent penalty if you get it wrong, Millington warned. On the other hand, tax preparers who get it wrong could be fined $5,000, so they have incentive to get it right, he added. It might also be a good idea to get an extension and file taxes later in the year in hopes the regulations will be out by then, he suggested.

The first sidebar is the type of profession to which it applies. “In general, most self-employed people, people who own rental properties, and small businesses, are eligible,” Lindstrom said.

But there are exceptions. It does not apply to health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage, or “any business where the principal asset is the reputation or skill of its employees or owners,” Millington said. The problem is some of those professions aren’t well defined. For example, architects and engineers aren’t listed, and just what counts as a performing artist, anyway?

On the other hand, limitations on professions don’t apply as long as your income is below a certain level: $315,000 for a person filing jointly and $157,500 for one filing singly. If your income is above $415,000 jointly or $207,500 singly, there is no deduction at all; if the income is in-between, the deduction is phased in, Millington said.

“If you’re in that gray area, we would encourage them to seek competent advice who can make that call,” Lindstrom said. “If you receive professional help and have that advice, that could be used to mitigate penalties.”

For people who qualify, they can reduce their “qualified business income” by 20 percent, which doesn’t include interest or dividend income, capital gains, commodity gains, income from outside the U.S., or wages, Millington said.

Other changes in the tax code include increases in the standard deduction, an additional $250 credit per child in Idaho, and tax brackets that are “lower and mostly wider,” Millington said. Despite the increases in the standard deduction, which make it less likely people will have to itemize, he recommended that people still track expenses they have traditionally itemized, just in case.