Question

The revised text of the Tax Cuts and Jobs Act (TCJA) of 2017 provides some support for sole-proprietorships, partnerships and S-corporations, but yet has eliminated certain miscellaneous deductions. Are sole proprietorships, partnerships and S-corporations truly benefitting from the revisions proposed by the TCJA of 2017? (please explain so we fully understand thank you!)

Answer 1

Yes, the TJCA of 2017 have led to benefits for sole proprietorships, partnerships and S-corporations. It should be noted that pass-through firms such as sole proprietorships, partnerships, and S-corporations are not subject to the corporate income tax. Unlike a C-corporation these business entities require the owners of the business to include their share of profits as taxable income under the individual income tax.

There were specific changes that TJCA enacted with regards to pass through business entities. For instance joint tax filers with a taxable income that is below $315,000 are now allowed to deduct 20 percent of their qualified business income (QBI). The limit for other filers (i.e. not joint filers is $157,500). This in turn will lower the effective top individual income tax rate on business income from 37 to 29.6 percent.

Under the prior law income from pass through business entities were taxed at ordinary income rates (maximum rate of 39.6%). The TJCA provides 20% deduction for qualified business income (maximum rate of 29.6%). While the deductible losses have been limited to $250,000 (in case of single filers) and $500,000 (in case of joint filers) the unused losses can be carried forward.

Thus, overall, the TJCA of 2017 have led to benefits for sole proprietorships, partnerships and S-corporations.