The Internal Revenue Service (IRS) has finalized regulations to clarify the new law that provides a 20% deduction on pass-through business income. Under the Tax Cuts and Jobs Act passed in December 2017, this law will be in effect for tax years 2018 through 2025.1
The regulations clarify who is eligible for the new 20% deduction and who is not. The following information is provided to help you decide whether it might make sense to restructure your business.
- Companies that are established under one organizational form may find it beneficial to restructure as the business evolves over time.
- Certain types of restructuring can result in more favorable tax treatment for the business and its owners.
- Recent regulations mean that certain loopholes have been closed, so make sure to understand all the implications and requirements of restructuring before undertaking it.
- A business must be a pass-through entity to claim the 20% qualified business income (QBI) tax deduction.
- Phaseouts and caps are imposed on specified service trade or business (SSTB) deductions.
To be eligible to claim a tax deduction for 20% of qualified business income (QBI), your business must be a pass-through entity.1 Pass-through entities are so named because the income of the business “passes through” to the owner. It isn’t taxed at the business level, but instead at the individual level.
Owners of pass-through businesses pay tax on their business income at individual tax rates. Pass-through businesses include sole proprietorships, partnerships, S corporations, trusts, and estates. By contrast, C corporation income is subject to corporate tax rates.23
The Internal Revenue Service (IRS) defines qualified business income as net business income, not including capital gains and losses, certain dividends, or interest income. The 20% deduction reduces federal and state income taxes but not Social Security or Medicare taxes, which means it also doesn’t reduce self-employment taxes—a term that refers to the employer-plus-employee portions of these taxes that people pay when they run their own businesses.1
The 20% QBI deduction, also called the Section 199A deduction after the part of the tax code that defines it, is calculated as the lesser of:
- 20% of the taxpayer’s qualified business income, plus (if applicable) 20% of qualified real estate investment trust dividends and qualified publicly traded partnership income
- 20% of the taxpayer’s taxable income minus net capital gains.1
The calculations are pretty complicated, so in this article, we’re going to keep things simple by not talking about real estate investment trust dividends or qualified publicly traded partnership income.
Section 199A Deduction Phaseout Levels
With a taxable income of $364,200 or less if you’re married filing jointly—and $182,100 or less for any other filing status (adjusted annually for inflation)—you can claim the full 20% deduction.4 However, according to a Tax Foundation report, many pass-through businesses are large companies, and “the majority of pass-through business income is taxed at top individual tax rates.”5
Certain hedge funds, investment firms, manufacturers, and real estate companies, for example, are often structured as pass-through entities. Thus, the limits stand to affect a great many taxpayers.
If you’re one of the taxpayers who own a pass-through business and you have taxable income above these limits, figuring out what deduction, if any, you qualify for under the new tax law is tricky.
Specified Service Trade or Business (SSTB)
The first thing you need to determine is whether you own what the IRS calls a specified service trade or business (SSTB). These are businesses in 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.”1
The IRS clarifies that the last clause (“…where the principal asset is the reputation or skill…”) is meant to apply to celebrity income, such as a famous chef being paid to allow a cookware line to use their name or a famous television personality getting paid to make an appearance.1
Financial advisors, wealth managers, stockbrokers, accountants, doctors, lawyers, and other businesses in the named fields are considered SSTBs. All others are not. Some of the interesting exceptions include architects, engineers, and insurance agents.
Under the new tax code, it’s generally better not to own an SSTB. Owners of SSTBs are subject to a phaseout and a cap on their deduction, adjusted for inflation each year. The phaseout for 2022 is $340,100 for married taxpayers and $170,050 for all other taxpayers.6 For 2023, the phaseout is $364,200 for married taxpayers and $182,100 for all other taxpayers.4 Within these ranges, the deduction is limited. Above these ranges, there is no deduction.
What happens if you’re the owner of a non-SSTB pass-through entity? Let’s say you’re single and your taxable income is about $207,500. You are allowed to take the deduction if you have qualified business income. However, your QBI deduction may be limited by the amount of W-2 wages your business has paid its employees, and by the unadjusted basis immediately after acquisition (UBIA) of the qualified property your business holds. The deduction is limited to the higher of 50% of total W-2 wages paid or 25% of total wages paid plus 2.5% of the UBIA of all qualified property.7
Changing Your Business Structure
If you think you might pay lower taxes as a non-SSTB pass-through entity, you might be wondering whether you should change your business structure in an attempt to lower your taxes—especially if, say, your high-revenue business both sells insurance and provides financial advice, meaning you have both SSTB and non-SSTB income.
Financial professionals should likely not try to classify themselves as something other than a financial advisor, retirement planner, or actuary to avoid being considered an SSTB. They are specifically excluded from benefiting from this deduction, but the IRS already knows that some businesses might try and skirt the law to get the benefit.
Business Structure Workarounds
Other workarounds that businesses are trying to use will not work in almost all cases as they are already being looked at by the IRS. These workarounds are referred to as “crack and pack,” or splitting up one business into two or more different businesses with the same owner to separate out SSTB income and non-SSTB income and avoid missing out on part or all of the QBI deduction.
The 80/50 rule says that if a ‘non-SSTB’ has 50% or more common ownership with an SSTB, and the “non-SSTB” provides 80% or more of its property or services to the SSTB, the non-SSTB will, by regulation, be treated as part of the SSTB.81
Some businesses may be able to get around the 80/50 rule by reducing the common ownership of the SSTB and non-SSTB businesses below 50%.
What about changing your pass-through business to a C corporation to take advantage of the 21% flat corporate tax rate, another change that is new under the 2017 Tax Cuts and Jobs Act?9
Converting from a pass-through entity to a C corporation for the lower 21% tax bracket usually is not a good idea due to the double taxation of dividends when taking distributions. A simplified example shows why. If you have a C corporation and have $1 million in C corporation income, you will owe $210,000 at the 21% tax bracket on the corporate tax return, form 1120. Then, when the corporation pays a dividend, you will pay tax again on that distribution on your personal return (form 1040).
Reducing Tax Liability
How then can high-income pass-through business owners best reduce their tax liability under the new rules? There are several steps they can take to reduce taxable income below the phaseout thresholds. These can include:
- Implementing larger retirement-plan contributions such as profit sharing or defined-benefit plans.
- Lumping charitable contributions through thoughtful use of donor-advised funds.
- Being intentional about realized capital gains and losses.
- Delaying other sources of income such as pension payments or Social Security.
Business owners who are limited by the 20%-of-taxable-income calculation might wish to increase taxable income through Roth conversions or changing retirement plan deferrals from pre-tax to Roth. Since the qualified business income deduction is limited to the lesser of 20% of QBI or 20% of taxable income, in addition to the asset and wage tests, taxpayers might not have enough taxable income to get the full benefit of the QBI deduction.
Suppose a taxpayer who is married and filing jointly has $100,000 of pass-through income and no other income. That individual would be eligible to deduct 20% of the total, or $20,000. But after taking the standard deduction of $27,700, their taxable income would be $73,000.10 Since 20% of taxable income is $14,600, and that’s lower than 20% of QBI ($20,000), the taxpayer can only deduct $14,600, not $20,000. However, if that person did a Roth IRA conversion of $27,700, taxable income would then be $100,000, and the taxpayer would be able to take the full $20,000 QBI deduction.
The Bottom Line
High-income owners of pass-through entities, especially those classified as SSTBs, should consult with a tax professional to formulate planning strategies that will increase the likelihood of their being able to get the most benefit from the qualified business income deduction.
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10 Essential Tips for Investing in Tesla Stock
Are you considering investing in Tesla stock? This article provides 10 essential tips to guide your investment decision. From analyzing financial performance to understanding market trends, these tips will help you make informed choices and maximize your potential returns.
Introduction: Investing in the stock market can be both exciting and daunting. With numerous companies and stocks available, it’s important to approach your investment decisions with careful analysis and research. Tesla, one of the most renowned electric vehicle (EV) manufacturers, has gained significant attention from investors worldwide. If you’re considering investing in Tesla stock, this article will provide you with essential tips to navigate the market effectively.
Table of Contents:
|Table of Contents|
|1. Analyze Financial Performance|
|2. Assess Market Trends|
|3. Understand Tesla’s Competitive Advantage|
|5. Consider the Regulatory Environment|
|5. Consider Regulatory Environment|
|6. Review Tesla’s Leadership and Management Team|
|7. Analyze Tesla’s Supply Chain|
|8. Monitor Industry and Technological Developments|
|9. Evaluate Risk Factors|
|10. Seek Professional Advice|
1. Analyze Financial Performance: (Tesla Stock)
When investing in Tesla stock, it’s crucial to analyze the company’s financial performance. This involves studying its revenue growth, profitability, debt levels, and cash flow. By understanding these metrics, you can gain insights into Tesla’s financial stability and potential for future growth.
2. Assess Market Trends: (Tesla Stock)
Staying informed about market trends is essential for making sound investment decisions. Research the electric vehicle industry, evaluate Tesla’s market share, and analyze its position in comparison to competitors. Identifying emerging trends and understanding consumer demand will give you a competitive edge.
3. Understand Tesla’s Competitive Advantage: (Tesla Stock)
Tesla’s competitive advantage lies in its innovative technology, brand reputation, and extensive Supercharger network. Dive deeper into these aspects to understand how they contribute to Tesla’s market position and competitive edge.
4. Evaluate Tesla’s Product Portfolio: (Tesla Stock)
Assess Tesla’s product portfolio, including its current lineup and upcoming models. Consider factors such as demand, production capacity, and consumer reception. Understanding the company’s product strategy will help you gauge its potential for growth and profitability.
5. Consider Regulatory Environment: (Tesla Stock)
The regulatory environment plays a significant role in the success of any company, particularly in the automotive industry. Stay updated on government regulations, incentives, and policies related to electric vehicles. These factors can impact Tesla’s operations and market performance.
6. Review Tesla’s Leadership and Management Team: (Tesla Stock)
Evaluate Tesla’s leadership and management team. Assess the experience and track record of key executives, their strategic vision, and their ability to execute plans effectively. Strong leadership is crucial for long-term success.
7. Analyze Tesla’s Supply Chain: (Tesla Stock)
Understanding Tesla’s supply chain is essential for assessing its manufacturing capabilities and potential bottlenecks. Analyze its relationships with suppliers, production efficiency, and ability to meet demand. A robust and efficient supply chain is critical for sustaining growth.
8. Monitor Industry and Technological Developments:
Stay informed about the latest industry and technological developments related to electric vehicles. Keep an eye on advancements in battery technology, autonomous driving, and renewable energy. Being aware of these trends can help you anticipate changes in the market.
9. Evaluate Risk Factors:
Every investment comes with its fair share of risks. Identify and evaluate potential risks associated with investing in Tesla stock. Factors like market volatility, competition, and regulatory changes can impact the company’s performance. Understanding these risks will assist you in making informed decisions.
10. Seek Professional Advice:
If you’re new to investing or feel overwhelmed by the complexities of the stock market, consider seeking professional advice. Consult with a financial advisor who specializes in investments and can provide personalized guidance based on your financial goals and risk tolerance.
- Is Tesla stock a good investment?
- Answer: Investing in Tesla stock can be a viable option, given the company’s growth potential and market position. However, thorough research and analysis are crucial before making any investment decision.
- How can I buy Tesla stock?
- Answer: You can buy Tesla stock through a brokerage account. Choose a reputable online brokerage and follow their instructions for opening an account and purchasing shares.
- What factors influence Tesla’s stock price?
- Answer: Several factors can influence Tesla’s stock price, including financial performance, market trends, industry developments, and broader economic conditions.
- What are the risks of investing in Tesla stock?
- Answer: Investing in Tesla stock carries risks, such as market volatility, competition, regulatory changes, and Tesla-specific factors like production delays or recalls.
- Can I invest in Tesla stock for the long term?
- Answer: Tesla stock can be suitable for long-term investment, but it’s essential to regularly monitor the company’s performance and stay updated on industry developments.
Conclusion: Investing in Tesla stock can offer significant opportunities, given the company’s pioneering role in the electric vehicle market. However, it’s crucial to approach your investment decision with careful consideration and research. By analyzing Tesla’s financial performance, understanding market trends, and evaluating various factors, you can make informed choices to maximize your potential returns. Remember to diversify your investment portfolio and seek professional advice when needed. Happy investing!
Nouman Khan As a blogger, I have honed my writing skills to deliver engaging and informative content that resonates with my readers. I have a natural curiosity for all things related to business, and I enjoy researching and sharing valuable insights, strategies, and trends that empower entrepreneurs and professionals.
Invest in Companies.
Investing in companies can be a lucrative way to grow your wealth over time. However, it’s important to understand the risks and rewards associated with investing in individual companies. Here are some key steps to follow when investing in companies:
- Do your research: Before investing in a company, it’s important to research the company’s financial health, business model, and competitive landscape. Look at the company’s financial statements, including its balance sheet, income statement, and cash flow statement, to get a sense of its profitability and financial stability. Read up on the company’s industry and competitors to understand the broader market trends and dynamics that could affect the company’s future growth prospects.
- Assess the company’s growth potential: Once you have a good sense of the company’s financial health and competitive position, consider its growth potential. Is the company in a growing industry? Does it have a track record of successful innovation and product development? Is it expanding into new markets? These factors can all contribute to a company’s potential for future growth and profitability.
- Consider the company’s valuation: When investing in a company, it’s important to pay attention to its valuation. This refers to the price of the company’s stock relative to its earnings or other financial metrics. A company with a high valuation may be overvalued and at risk of a price correction, while a company with a low valuation may be undervalued and a good value investment opportunity.
- Diversify your portfolio: Investing in individual companies carries risk, so it’s important to diversify your portfolio to reduce risk. This means investing in a mix of stocks, bonds, and other securities to spread your investments across different companies and industries.
- Monitor your investments: Once you’ve invested in a company, it’s important to monitor your investments over time. Keep an eye on the company’s financial performance, news, and any changes in the broader market that could affect the company’s stock price. You may need to adjust your investment strategy over time to respond to changing market conditions.
In summary, investing in individual companies can be a rewarding way to grow your wealth, but it’s important to do your research, assess the company’s growth potential and valuation, diversify your portfolio, and monitor your investments over time. By following these steps, you can make informed investment decisions and increase your chances of success in the stock market.
Investing in Digital Yuan: A New Era of Currency
The digital yuan, also known as e-CNY or DCEP (Digital Currency Electronic Payment), is the digital version of China’s currency, the Renminbi (RMB). The digital yuan is being developed by the People’s Bank of China (PBOC) and is seen as a major step towards a more digital and cashless society. The digital yuan is currently in trial phase and has been piloted in several cities across China, with the goal of a nationwide roll-out in the near future.
Why Invest in Digital Yuan?
- Growing Adoption: As the world moves towards a cashless society, the digital yuan is poised to become a major player in the digital currency market. With a population of over 1.4 billion, the adoption of the digital yuan has the potential to be huge, making it an attractive investment opportunity.
- Backed by the Chinese Government: The digital yuan is being developed and backed by the PBOC, which is the central bank of China. This provides a level of security and stability for investors, as the government is committed to ensuring its success.
- Increased Efficiency: The digital yuan is designed to be faster and more efficient than traditional currency. Transactions can be completed quickly and securely, without the need for intermediaries like banks. This could potentially lead to lower transaction fees, making the digital yuan a more attractive option for consumers and businesses.
- Increased Accessibility: The digital yuan is designed to be accessible to everyone, regardless of their location or financial status. This could potentially increase financial inclusion, making it easier for people to access basic financial services.
Risks of Investing in Digital Yuan
- Regulation: The digital yuan is a relatively new technology and is still in the trial phase. As such, there are many uncertainties surrounding its regulation, which could potentially impact its value.
- Competition: The digital yuan is not the only digital currency on the market and will face competition from other digital currencies, such as Bitcoin and Ethereum. This competition could potentially impact its adoption and success.
- Security: As with any digital currency, the digital yuan is vulnerable to hacking and cyberattacks. This could potentially impact its value and stability.
In conclusion, investing in the digital yuan is an exciting opportunity, but it is important to consider the risks involved. As with any investment, it is important to do your own research and assess whether the digital yuan is right for you. With the backing of the Chinese government, the potential for widespread adoption, and increased efficiency and accessibility, the digital yuan is definitely worth keeping an eye on.
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