The hurdles in obtaining the deduction under the Tax Cut and Job Act.
If you pass all of the limits below you still have an umbrella limit of 20% of (taxable income- capital gains).
In addition to the umbrella limit there are three bucket tests.
I. Everyone who has taxable income under 157,500 single and 315,000 married. 20% of the Qualified Business Income (net income from your business).
So for example in this bucket it is the lessor of 20% of TI or 20% of QBI.
II. Specific Service and Trade Business. Lawyers, Doctors, Consultants who make over the 157,500 single and 315,000 married. Phase out until 207,500 for single and 415,000 for married. After the phase out of 207,000 and 4150,000 no deduction.
III. Non Specific Service and Trade Business over 157,500 single and 315,000 married. Lessor of:
20% of QBI
the greater of 50% of wages vs 25% of wages + 2.5% of assets.
For example a roofer does not have that much in the way of equipment. So I think 50% of wages is most likely to be the greater number. Of course you should do the 25% + 2.5% of asset test.
So it comes down to the lessor of
20% of QBI
50% of wages.
IF you are an employee of a S corp you should consider taking a year end bonus to increase your 50% number. Or consider hiring your spouse if you are a Sole proprietor or and LLC.
For example your QBI (net income ) is 100,000
So 20% of $100,000 is $20,000. But what if you wages are only 5,000. Then 20% of 5,000 is 1,000 and so you end end with just 1,000 as the 20% qualif
Now for example, you pay yourself a bonus of 23,000. Let’s see what happens.
100,000 -23,000 = 77,000 x .2 = 15,400.
compared to 23,000 + 5,000 = 28,000 X 5 =14,000 So now the QBD is 14,000( the lessor of 15,400 or 14,000)
Okay so the 14,000 X your tax rate (IRS and state) is for example .35 = 4,900.
What is the payroll cost of the additional salary ? 23,000 X .153 = 3,519
So you save roughly 1,400.
The use of the salary bonus works best when the employee is over the SS limit already.
So for example maybe you have already paid yourself from the company over the social security limit, or your spouse works for the government and makes over 128,400 for 2018. Then the business is only paying the employer side and the benefit of the bonus is improved.
Of course the IRS could ask what your spouse did for the company for 23,000 salary.
This is just a general discussion. See your tax preparer for any questions.