Entrepreneurs hoping to pocket some tax deductions for 2019 shouldn't forget a new 20% break.
The qualified business income or QBI deduction made its debut in 2018, a feature of the Tax Cuts and Jobs Act.
The new write-off allows owners of "pass-through" entities, including S-corporations and partnerships, to deduct up to 20% of their qualified business income. Tax professionals first grappled with this new rule earlier this year, when the IRS rolled out further guidance.
The changes have come at such a rapid pace that even tax-planning software had a hard time keeping up.
"The issue with the QBI deduction came with calculating it," said Michael D'Addio, a principal at Marcum LLP.
"The software companies had to keep up; the IRS had to issue guidance and regulations in a complex set of statutes, and the practitioners had to absorb the information coming out to properly advise clients and be certain of the results produced by the software," he said.
"There were massive amounts of time to be invested by all parties concerned."
About 15.6 million tax returns claimed the QBI deduction on their 2018 taxes, according to IRS filing data through July 25. That's the most recent set of figures the agency has available.
That number is likely to be higher, since many entrepreneurs with more elaborate returns tend to go on extension and file their returns on Oct. 15.
Not everyone can partake of the deduction.
First, business owners in any industry are free to use it if they have taxable income that's under $160,700, if single, or $321,400, if married and filing jointly in 2019. The IRS applies limitations over those thresholds.
In addition, taxpayers in a "specified service trade or business," including doctors, lawyers and accountants, can't claim the deduction at all if their taxable income exceeds $210,700, if single, or $421,400, if married.
If you're not in a "specified service trade or business," then the rules are a little different.
In that case, you get a reduced deduction if your taxable income exceeds the $160,700/$321,400 threshold but is still under the $210,700/$421,400 threshold.
If your business isn't in a specified service trade or business, and your taxable income exceeds the $210,700/$421,400 threshold, then your deduction is generally capped as a percentage of W-2 wages paid to your employees.
Here's another consideration: The QBI deduction is only around until the end of 2025, when it will expire unless Congress acts. Keep that in mind before you overhaul your business.
In September, the IRS issued guidance on the deduction and its applicability to owners of rental real estate.
Those rules include maintaining separate books and records for each rental enterprise, as well as performing and documenting at least 250 hours of rental services in a year if the enterprise has been around for less than four years.
Landlords who've had their rental business for longer than that must document at least 250 hours of rental services in three of the last five years.
Rental services include maintenance and repairs on the property and supervising people who work there.
Other tasks, including time spent purchasing property or traveling to and from your real estate, won't count toward the hourly requirement.
Landlords will need to keep immaculate records to prove they're following the rules.
"Save your documents and receipts; you need to support your hours," said Troy Lewis, CPA, associate teaching professor at Brigham Young University.
Failure to meet those September guidelines doesn't bar you from claiming the deduction, but the burden of proof is on you if you're audited.
If you're hope to take the deduction as 2019 winds down, just make sure you have your paperwork in order.
Document everything. Be sure to closely review the receipts and statements that pertain to your business. Prepare to turn these in to your accountant.
If you're hoping to claim the deduction for a property you rent out, the IRS will want to know how much time you actually spent on maintenance, management and more.
Work with a pro. Do a gut check of your appetite for the deduction, and prepare for the possibility that you may have to make your case to the IRS.
"There are gray areas where it's a matter of your tax risk tolerance," said Jeffrey Levine, CPA and CEO of BluePrint Wealth Alliance. "Are you a fighter, or are you going to say, 'I have bigger things to worry about'?
Avoid drastic moves. Last summer, the IRS put the kibosh on aggressive strategies accountants pitched to help entrepreneurs qualify for the break.
The qualified business income deduction is still a work in progress — and it's only around until the end of 2025 — so slow down before doing anything too drastic.
"The well-advised client will view this as another data point to reevaluate their structure and business," said Jonah Gruda, CPA and partner at Mazars USA. "But I always tell them that, while tax is an important aspect of business decisions, it's only an aspect."