Taxes Change for Partnerships and S Corporations

Congress has been busy in recent weeks on changes to the tax code that will reduce the taxes paid by individual and corporate residents throughout the U.S. Whether that’s a good or bad thing is subject to debate and opinions as to how tax policy impacts behavior, and we’ll leave that discussion for other forums. But since many of our clients are pass-through entities (or owners of pass-through entities), we wanted to provide a quick update as to the changes.

The biggest change to discuss for pass-throughs is this: the current proposal is that sole proprietors, most S corporation shareholders, and partners in a partnership will be entitled to a deduction equal to 20% of their allocable share of business income. There are some limits to this. For example, the deduction cannot exceed 50% of the share of the W-2 wages paid by the business. Also, the owners of “personal service businesses” are not eligible to take the deduction unless the individual’s taxable income is less than $157,500 (or $315,000 if married, filing jointly).

This proposal has passed through conference committee, and both houses of Congress are set to vote on the proposal this week. Most expect the proposal to pass. Stay tuned …

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