Nine months after the whirlwind enactment of the Tax Cuts and Jobs Act of 2017, most Americans remain unimpressed. In recent polling, only 39 percent approve of the new law, while 43 percent don’t like it. Yet, according to the White House, 82 percent of all middle-income households will receive a tax cut. Obviously, there’s a disconnect.
For millions of self-employed real estate professionals, including agents and brokers, one of the missing pieces of the puzzle is a brand-new deduction that few taxpayers know about, and fewer still understand. Meet the 20-percent deduction for qualified business income.
The centerpiece of the new tax law is a reduction in the corporate tax rate from 35 to 21 percent. Proponents of the plan knew, however, that nine out of 10 businesses in America aren’t organized as corporations. Rather, they’re pass-through businesses such as partnerships, limited liability companies, S corporations, or most common of all, individual entrepreneurs who own their own businesses. Self-employed independent contractors such as real estate agents are perfect examples.
Knowing that these Main Street businesses wouldn’t appreciate a Wall Street-only business tax cut, Congress included a similarly robust tax cut in the form of a special 20-percent deduction. But the problem is that many of the self-employed and other pass-through business owners aren’t yet aware of the deduction and how it applies to them.
The great news for most agents and brokers is that the 20-percent deduction is available and is fairly simple and straightforward if their taxable income for the year is below a certain threshold. For married taxpayers filing a joint return, this income limit is $315,000. For everyone else, it’s half this amount, or $157,500. Even better, a partial deduction may be claimed for incomes of up to $415,000 (joint returns) or up to $207,500 (everyone else).
For business owners with incomes above the thresholds, the deduction is more complex. The law offers a 20-percent deduction on certain income from a “qualified trade or business.” This is defined as every enterprise except for a dozen or so prohibited businesses including health, law, accounting, brokerage services and consulting. Providing services to an employer as an employee doesn’t count.
Initially, it was unclear how these restrictions were going to be applied to those engaged in real estate brokerage with incomes above the thresholds. However, in a big win for those who help people buy and sell real property, the Internal Revenue Service (IRS) ruled in August that “brokerage services” doesn’t include real estate broker activities.
The bottom line is that a very high percentage of real estate professionals, with income both below and above the limits, will find a new, hefty deduction awaiting them come tax time next year. Even better, this year’s estimated tax payments can be reduced to take it into account. For frequently asked questions about Section 199A, go to the IRS website.
Evan Liddiard is a senior policy representative, Federal Taxation, for the National Association of REALTORS® (NAR). This column is brought to you by the NAR Real Estate Services group. For more information, please visit www.nar.realtor.
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