While the new Tax Cuts and Jobs Act should provide a substantial tax benefit to individuals with qualified business income from a partnership, S corporation, LLC, or sole proprietorship, that benefit unfortunately comes with a cost: additional information needed from you, the business owner, in order for us at MGA to properly prepare your annual tax return.
Once an individual’s taxable income exceeds $315,000 for joint filers ($157,500 for non-joint filers), qualified wages and property come into play when calculating their qualified business income deduction (QBID) for non-Specified Service Businesses (non-SSBs). The TCJA and the IRS have mandated that all qualified businesses must report qualified business income (QBI) wages on K-1s issued to owners.
What additional documentation does MGA need from you this year?
For us at MGA to accurately report your QBI wages, we will need a copy of the W-3 you filed for the 2018 tax year. Many businesses have started leasing their employees from an outside payroll provider for various reasons, and it’s important to note that these wages still qualify for the QBID. Please ensure that your payroll service provider can provide either a W-3 specific to your employees or a detailed wage report.
Members or partners of an LLC or partnership are not supposed to receive salaries for services provided in their official capacity as a partner. If any member or partner receives W-2 wages, it will reduce your QBI wages and can potentially reduce the QBID. Therefore, all compensation paid to partners should be in the form of guaranteed payments.
Unlike partnerships or LLCs treated as partnerships, S corporations are required to pay a reasonable salary to all actively participating shareholders. Even if no reasonable compensation was paid to the participating shareholders, a reasonable compensation amount will be calculated and reduce the QBI, ultimately reducing the potential QBID.
The TCJA is complex. Let MGA help make it simple.
We understand that the new TCJA is substantial and comes with numerous changes. If you have any questions or wish to work through the mechanics of the deduction or additional information needed to properly prepare this year’s tax return, please don’t hesitate to give your team a call.