K.M. Minemier & Associates is a certified Woman Owned Small Business (WOSB) engaged in full service real estate asset management and marketing.

HUD Articles

Major Provision of New Tax Bill Affecting Real Estate Professionals

February 15, 2018

Article provided by MS Real Estate Leader Magazine

Deduction for Qualified Business Income

Because the new tax bill greatly decreases the tax rate for
corporations (from the prior law's 35% to just 21 %), many
Members of Congress believed that the business income earned
by sole proprietors, such as independent contractors, as well as
by pass-through businesses, such as partnerships, limited liability
companies (LLCs), and S corporations, should also receive tax
rate reductions. In addition to lower marginal tax rates, the final
bill provides a significant up-front (above the line) deduction of
20% for business income earned by many of these businesses,
but with certain conditions.

Specifically, the bill limits the 20% deduction to non-personal
service businesses. Essentially, a personal service business is one
involving the performance of services in the following fields:
Health, Law, Consulting, Athletics, Financial Services,
Brokerage Services (not real estate), and ''Any business where
the main asset of the business is the reputation or skill of one or
more of its employees or owners."

It seems clear that most real estate agents and brokers will be
considered in a personal service business and would thus not
normaμy qualify for the 20% deduction.

However, NAR was able to help secure a major exception
(the personal service income exception) in the final bill that will
make it possible for many real estate professionals to be able to
take advantage of the deduction.
 ~ This exception provides that if the business owner has taxable
income ofless than $157,500 (for single taxpayers) or $315,000
(for couples filing jointly), then the personal service restriction
will not apply.
~ Above this level of income, the benefit of the 20% deduction is
phased out over an income range of $50,000 for singles and an
8 Mississippi Real Estate LEADER I Winter 2018
income range of $100,000 for couples.
~ For those with non-personal service income above these thresholds,
the bill provides a second exception that may still allow a
full or limited 20% deduction. This second exception (the wage
and capital limit exception) places a limit on the deduction of the
greater of:

      ~ 50% of the W-2 wages paid by the business, or
      ~ The total of25% of the W-2 wages paid by the business
         plus 2.5% of the cost basis of the tangible depreciable
         property of the business at the end of the year.


Bottom Line: Independent contractors and pass-through
business owners with personal service income, including real
estate agents and. brokers, with taxable income below the
$157,500 or $315,000 thresholds may generally claim the full
20% deduction under the personal service income exception.
Independent contractors and pass-through business owners
with non-personal service income and total taxable
income below these thresholds may also claim the full 20%
qualified business income deduction. In addition, independent
contractors (or other sole proprietors) with non-personal service
incomes above these thresholds may also be able to claim a
20% deduction, but that deduction may be limited by the wage
and capital limit exception.


Section 179 Expensing
~ The final bill increases the amount of qualified property eligible
for immediate expensing from $500,000 (current law) to $1
million. The phase-out limitations are increased from $2 million
to $2.5 million.
~ The final bill expands the definition of qualified real property
eligible for section 179 expensing to include any of the following
improvements to nonresidential real property placed in service
after the date such property was first placed in service: roofs; heating,
ventilation, and air-conditioning property; fire protection and
alarm systems; and security systems.
~ The bill also significantly increases the amount of first-year depreciation
that may be claimed on passenger automobiles used in
business to $10,000 for the year in which the vehicle is placed in
service, $16,000 for the second year, $9,600 for the third year, and
$5,760 for the fourth and later years in the recovery period.
Denial of Deductibility of Entertainment
Expenses

~ The final bill provides that no deduction is allowed with respect to:
                ~ An activity generally considered to be entertainment,
                   amusement, or recreation;
                ~ Membership dues with respect to any club organized for
                   business, pleasure, recreation or other social purpose, or
                ~ A facility or portion of a facility used in connection with
                   the above items.
~ Thus, the provision repeals the present-law exception to the deduction
disallowance for entertainment, amusement, or recreation
that is directly related to (or, in certain cases, associated with) the
active conduct of the taxpayer's trade or business.
~ Taxpayers may still generally deduct 50 percent of the food and
beverage expenses associated with operating their trade or business
(e.g., meals consrlmed by employees on work travel).


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