
Pass-Thru Income Deduction - ljoshua
https://evergreensmallbusiness.com/pass-thru-income-deduction-dozen-things-every-business-owner-must-know/
======
ttcbj
Thanks for posting this, I have been looking for just such a summary. I think
I will be a significant beneficiary of this provision (as I currently
understand it, anyway), but I agree with other commenters that I wish we could
just make things simpler and more fair.

Over the last 10 years I have had experience with small business taxes, small
business retirement plans, and various estate-tax avoidance schemes. The tax
code is a joke. It rewards people who have the resources to game it, and it
employs an entire class of people who specialize in doing just that. Its
demoralizing, but while it exists, everyone has to play the game.

Edit: Also, that same site has an even more detailed summary of the deduction
here:

[https://evergreensmallbusiness.com/sec-199a-qualified-
busine...](https://evergreensmallbusiness.com/sec-199a-qualified-business-
income-deduction/)

~~~
freehunter
Agreed. As a small business (pass through LLC) owner, I'm willing to pay just
about any tax that's demanded of me as long as every one of my peers is
subject to the exact same taxation. If the tax is so high that it puts me out
of business, I want to know that every one of my competitors is out of
business, too. If the tax is so high it forces me to close my physical shop
and go online, I want to know my competitors are all closing their doors too.
And if I'm making record profits, hey now I can focus on competing on the
merits of my product.

But if I have to shut down while my competitors stay open just because they
hired a better CPA? Especially as a small business? That's a problem for me. A
much bigger problem than the tax rate being 22% instead of 21%.

------
cornellwright
One of the worst things about the current tax code (and soon-to-be new tax
law) is the cost of compliance. You can argue about high tax or low tax and
who should pay more than whom, but cost and time to comply does not create any
value and is an artificial way that we make our country less competitive.

This article is a clear example of that, laying out 10 different things you
need to know with complicated formulas for deduction and professions that do
and do not get benefits. What a mess.

~~~
jfaucett
completely agree with this sentiment.

I've often wished a test city/state would be allowed to just do a flat tax and
completely remove all tax code and see what happens.

Obviously the convolutedness is a barrier to entry to small startups and a
unfair advantage for established market entities.

Also I'd love to see an experiment on a zero tax law that basically amounted
to no taxes unless the business/person earned a net profit of something deemed
reasonable (say 30-50k in a modern society).

Why our societies constantly try to suffocate individuals trying to innovate
and create value for his fellow members of society is beyond me.

~~~
techsupporter
> I've often wished a test city/state would be allowed to just do a flat tax

I don't want a flat tax (as in "all income taxed at 15%," let's say) because a
flat tax has an unfair impact on people at lower income levels. But,
otherwise, I agree with your entire post. Here's my ideal law, with the caveat
that I have zero legal training beyond six seasons of Law and Order and four
seasons of Suits:

(1) The following marginal rates are established:

(Emphasis here: these numbers are made up for demonstration purposes only.)

\- $0 through $13,000: 0%

\- $13,001 through $25,000: 5%

\- $25,001 through $46,000: 8%

\- and so on

(2) All money earned, by whatever means and from whatever source, by a person
or legal entity resident in the United States shall be subject to the tax
specified above.

(3) The Internal Revenue Service shall, no later than the 15th of April of
each calendar year (or the next day following the business day after the 15th
of April if the 15th of April falls on a Saturday, Sunday, or federal
holiday), prepare and mail to each holder of an EIN, each person for whom any
tax or income declaration form (such as W2, 1098, 1099, and similar) has been
submitted to the IRS, a statement of what the IRS believes the taxpayer owes
or is due as a refund.

(4) If the IRS has notified the taxpayer that the IRS believes the taxpayer is
due a refund, the taxpayer may notify the IRS of a financial account located
inside the United States into which such refund shall be deposited or may
request a paper check for such refund or, under such rules as the Secretary
shall provide, make a request for United States Savings Bonds. Any request
must be made within five years of the date the taxpayer knew or reasonably
should have known that the refund was due, otherwise the refund is the
property of the Treasury absent a showing of exigence.

(5) If the IRS has notified the taxpayer that the IRS believes the taxpayer
owes additional taxes, the taxpayer shall make payment to the IRS no later
than the 15th of July following receipt of said notice (or the next day
following the business day after the 15th of July if the 15th of July falls on
a Saturday, Sunday, or federal holiday) by providing the IRS with debit
instructions for a financial account located inside the United States or via a
paper check or other form of transfer of dollars.

(6) In the case that the taxpayer disagrees with a notice provided by the IRS
under paragraphs 5 or 6, the taxpayer shall, no later than the 15th of July
following receipt of said notice (or the next day following the business day
after the 15th of July if the 15th of July falls on a Saturday, Sunday, or
federal holiday), file the tax forms designated by the IRS under such rules as
the Secretary shall provide, to indicate what the taxpayer believes is the
proper tax due or refund owed. If the taxpayer still owes additional tax, the
tax payment shall be due at the time of filing. The IRS shall have 120 days to
respond, otherwise the taxpayer's submission is deemed valid and binding upon
the IRS.

(7) There is no paragraph seven.

~~~
snotrockets
There's a problem here: one of the goals of taxation is to encourage certain
behaviors (like creating new employing in a low-employment region, or saving
for retirement) and discourage others (like smoking).

You remove this important policy tool, offering no other tool to replace it.

~~~
techsupporter
I don't see that as a problem. It's the old "it's a feature, not a bug." Using
the tax code as a cudgel for social change has, in my view, more downsides
than upsides. On the one hand, exempting retirement savings is probably a good
thing (making it easier for people to provide for themselves in their later
years). But, on the other, exempting the cost of owning housing is probably
not a good thing (encouraging sprawl and crazy lending standards).

The tax code should, in my current view which I'm willing to entertain
rebuttals against, be used to raise revenue for the operation of the
government. If you want to use the government to encourage other behaviors, do
it in another way, like direct payments or some other incentives I can't think
of right now, but keep the tax code simple lest we wind up with, frankly, the
mess we have now.

~~~
snotrockets
Assuming you can rewrite the code to be simple is hubris.

Every non trivial system gets more complex with time, as you discover more and
more edge cases, similar to software, and as we all finding out now, a rewrite
would replace a known set of issues with an unknown set of issues.

------
Stratoscope
I'm no expert, but from what I've seen, many people who are reading this
should not get their hopes up.

If you're a software developer operating either as a sole proprietorship or as
an S corporation, I don't think you'll get the deduction. (If you have an LLC,
that doesn't mean anything to the IRS; it's treated either as a "disregarded
entity", i.e. a sole proprietorship, or as an S or C corp if you've taken that
election.)

See Steve's comment on the article from 12/19 at 2:48 PM, replying to someone
asking whether developers and other IT professionals would get this break:

> The Sec. 199A statute references another older chunk of tax law, Sec
> 1202(e)(3)(A). It says this:

> “…any trade or business involving the performance of services in the fields
> of health, law, engineering, architecture, accounting, actuarial science,
> performing arts, _consulting_ , athletics, financial services, brokerage
> services, or any _trade or business where the principal asset of such trade
> or business is the reputation or skill of 1_ or more of its employees…”

> So computer/IT consulting pretty clearly fits within the “consulting”
> category.

> Also, if you’re a one person business, it seems pretty tricky to argue
> against the position that the principal asset of the business is the
> reputation or skill of the 1 employee doing the work.

I would appreciate correction if I'm misunderstanding this, as I certainly
like tax deductions!

~~~
NickM
My understanding though is that these restrictions only apply to high earners
(>157.5k single, >315k married), and even then the restrictions phase in
gradually until you hit an even higher income. I would bet that most software
developers have low enough incomes to qualify for some or all of the
deduction, regardless of whether developers and IT professionals fall under
the restricted categories. I could be wrong, so don't take my word for it, but
I wouldn't give up hope just yet unless someone can elaborate on why this
isn't the case.

~~~
zrail
Yep. Keep in mind that those numbers are _taxable income_ not _gross income_.
That means all deductions (including the standard deduction) except the 199A
deduction itself apply before the 199A deduction. Even if you make a huge
amount of gross income you can get below that threshold fairly easily by, for
example, setting up a 401(k) and a defined benefit pension plan.

------
mpolichette
Super nit pick:

Is it just me or is it a bit disheartening that they have defined this using
the term `thru` which google defines as `informal spelling of through`?

Isn't a legal document about as formal as one can get? I'm just worried it
opens opportunity for confusion from the ambiguousness of language.

Slippery slope: Next thing we'll see is a law defining how much of a deduction
you get with the money with wings emoji.

~~~
pfranz
Maybe it was to reduce ambiguity? Often legal documents define terms up front
("the participant" refers to John Doe). If they choose a common work like "is"
or "through" it can become a rubik's cube trying to correctly discuss it.

------
aantix
Another detailed summary of the pass-thru changes. [http://rsmus.com/what-we-
do/services/tax/washington-national...](http://rsmus.com/what-we-
do/services/tax/washington-national-tax/final-pass-through-rules-mostly-
favors-middle-market-and-real-es.html)

------
tunesmith
Does this change the incentives on how S-Corps structure salary versus
distribution? Sometimes people keep salary low (but still "reasonable") and
distributions high to limit FICA. Other times people inflate their salary (and
keep distributions low) to be able to contribute more to 401k profit-matches
and social security.

Since it's a pass-through, it seems like taxable income might be roughly the
same either way, so maybe it doesn't impact the size of the deduction all that
much. Has anyone thought through this?

~~~
CPLX
> to be able to contribute more to... social security

I don't think that makes a whole lot of sense. Do people actually do that?

~~~
meritt
Why do you think that's absurd? Social Security is basically a very
inefficient (and potentially insolvent) retirement plan. The more you put into
it, the more you should get out. That's why people would want to maximize
contributions.

~~~
CPLX
I guess you'd have to do the math and maybe there's an edge case but it seems
almost totally and completely inconceivable that you'd be better off
increasing your rate of payroll income (which also adds the 2.9% Medicare tax
as well) in hopes of one day getting larger social security checks, rather
than the alternative of keeping and saving it now.

------
tuna-piano
As someone with a pass-they entity (s Corp) who has done my own personal and
business taxes (with payroll for myself from gusto/ zen payroll)... this all
seems so complicated i expect to hire an accountant for the first time next
year.

How the hell is this being touted as making the tax code simpler?

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tabeth
I wonder if it'd be simpler to just eliminate all taxes except sales tax and
have a progressive sales tax.

For example:

$0 - $20,000 - 0% (yes, poor people wouldn't pay sales tax. You could even
make it so poor people get a discount, even.)

$20,001 - $40,000 - 5%

etc.

The above tiers would be defined by income plus assets times some interest
rate, to represent potential gain on assets, if it were liquidated and
invested. So if you had 1M in assets, and made $100,000 a year, your income
would be $100,000 + 1M * federally defined interest rate.

The main difficulty with this would be that debit/credit cards would have to
be issues by the government or there would have to be some collaboration
between the government and banks in order to accurately determine purchases.

~~~
bungie4
Your assuming the very rich purchase proportionately more taxable goods and
service than the lower classes do.

~~~
tabeth
Well the idea is that the money will eventually be spent or transfered, and
then during that event it would be taxed. I mean sure you could just let the
money grow but I assume it would either be given to someone or spent
_eventually_.

------
perseusprime11
Should everyone be thinking of becoming a pass through business? Person Inc.
works for Big Business Inc. Everybody pays 20% tax and we are all happy.

~~~
nodejsbangalore
I might be wrong but I think that tax rate is not 20%.

I think the deduction is 20%. If I understand it correctly then what it means
is that if you have earned $100k then you are taxed only on $80k and 20% (20K
in this case) is your deduction.

Can someone confirm/deny it.

~~~
misiti3780
but not if you are a software consulting apparently:
[https://news.ycombinator.com/item?id=15973178](https://news.ycombinator.com/item?id=15973178)

~~~
spikels
and your taxable income exceeds $315,000 for married individuals filing
jointly or $157,500 for individuals. The 20% deduction starts phasing out at
those levels.

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jermaustin1
This was a handy guide. I learned something. I was under the assumption the
20% deduction was only on the income you took as a distribution, NOT all of
the income.

I literally jumped for joy... then I read #5, and had a sad. I still come out
better than I originally thought, but not as good as #4 led me to believe.

~~~
jacob019
As I understand it, your original assumption was correct. The 20% only applies
to distribution income, not to W-2 income. But the 20% deduction is limited to
50% of the W-2 income. So to maximize the deduction and minimize payroll
taxes, the business owner will try to set his W-2 wages at 40% of the pass-
through income, or two sevenths (~28.57%) of the business income before owner
wages.

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cmurf
_The plan would also provide many pass-through businesses with a 20 percent
deduction for pass-through business income. Specified service business would
be ineligible, except for households with taxable income below $157,500 for
single filers and $315,000 for married filers. This provision reduces revenue
by $289 billion. The pass-through provisions expire at the end of 2025._
[https://taxfoundation.org/final-tax-cuts-and-jobs-act-
detail...](https://taxfoundation.org/final-tax-cuts-and-jobs-act-details-
analysis/)

------
mrfusion
Does it not apply for LLC s? What about software freelancers?

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the_cat_kittles
if you are happy that you can save some money this way, i think you are super
lame. i am sad that over paid people like me and most of yall are now even
less responsible for helping poor people (among other things, i know... )

~~~
pascalxus
First of all, this bill mainly helps those earning less than 315K per family <
157K for singles.

If you're making a big salary working for tech, your not as well off as you
think. You may be earning x10 more than a the average "poor" person, but after
income taxes, sales tax, property tax, etc, it's barely x5 to x6. And if
google forces you to live on the penninsula, then your living costs are x5 to
x10. I'm sure there are plenty of high tech working families in 150k to 250k
range who are barely making ends meat. Those with kids will be especially hit
hard: the exemption for those kids is now gone. Millenials in CA are being hit
really hard with this housing crisis: the birth rate is at it's lowest it's
ever been since the great depression in 1933.

~~~
munk-a
Granted, everything about this is in constant flux but... I thought the child
exemptions were back in and stronger than before?

Also, are you getting value out of living on the penninsula? If so, is it
worth the cost you're paying? If not... move. There are plenty of companies
outside of SV and now quite a few of the companies there have very flexible
remote working options.

As for your 10x income being reduced to 6x, do you honestly feel justified
making more than 2x as someone else? Why are you as a person worth twice any
other person?

~~~
pascalxus
It's because that's the intersection of value that an employer is willing to
pay for and people are willing to work for. If everyone was paid exactly the
same, then there probably wouldn't be any doctors because they'd never break
even on their medical school payments, etc. Higher wages is
society/capitalism's way of incentivizing more people to go into that area.
there's greater need there. By paying more, more people are willing to join
that occupation.

It seems weird to take the fruits of someone's labor. I mean, if you can make
your bed twice as fast as I can, I don't demand that you come over and make
1/3 of my bed.

And if you grow your crops, but do it much better, yielding more fruit, it
would be wrong of me to take a 1/3 of your crops.

