MoldMaking Technology

NOV 2018

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34 MoldMaking Technology —— NOVEMBER 2018 THE BOTTOM Reducing a Mold Shop's Top Effective Tax Rate By Michael J. Devereux II, CPA, CMP The U.S. Treasury and the IRS proposed new rules this past summer under §A (also known as the deduction for quali- •ied business income), which the Tax Cuts and Jobs Act (the Act) introduced. These rules provide a deduction equal to ‚ƒ percent of qualifying business income for the owner of a flow- through entity (which includes S corporations, partnerships and sole proprietorships) with the potential to reduce a mold shop's top effective tax rate to ‚.† percent. This new provision applies to tax years beginning after December ˆ, ‚ƒ‰ and before January , ‚ƒ‚†. Generally, most non-corporate U.S. mold shops will qualify for the new flow- through deduction. Mold shops should review the new rules to ensure that they do not limit their potential §A deduction. In the case of an S corporation or a partnership, the deduc- tion is determined at the individual or trust level, and the deduction cannot exceed ‚ƒ percent of the shop's taxable income. Losses for qualifying businesses are carried forward to offset future qualifying business income. Each shareholder or partner must consider his or her allocable share of quali•ied items of income, gain, deduction and loss to determine his or her quali•ied business income. The deduction is "below the line." That is, the §A deduction is not a part of computing the adjusted gross income (AGI). Instead, it is a deduction in the calculation of federal, taxable income. As noted, the §A deduction can have the effect of lowering the tax rate to ‚.† percent for taxable income related to a quali•ied business like a U.S. mold shop. Wage and Property Limitation For mold shop owners with higher income, §A imposes a wage and property limitation. The §A deduction is equal to the lesser of either ‚ƒ percent of the quali•ied business income or the wage and property limitation. The wage and property limitation is equal to the greater of •ƒ percent of the shop's W-‚ wages and the sum of ‚• percent of the shop's W-‚ wages plus ‚.• percent of the unadjusted basis immediately after acquiring (UBIA) quali•ied property. As with items of income, gain, deduction and loss, shareholders of S corporations and partners of partnerships must consider their allocable share of the W-‚ wages and UBIA of quali•ied property to determine their wage and property limitation. The wage and property limitation does not apply to shops with taxable income below a threshold amount (which is $ˆ•,ƒƒƒ if •iling a joint return). The wage and property limitation is phased in for a joint return with the full wage and property limitation applicable once taxable income reaches $™•,ƒƒƒ. Specified Service Trades or Businesses For high-income taxpayers, §A provides that no deduction is allowed for Speci•ied Service Trades or Businesses (SSTB). These include a litany of different service businesses, such as law, accounting, health, consulting businesses and those for which the principal asset is the reputation or skill of one or more of its employees or owners. The exclusion for SSTBs does not apply to shops with taxable income less than the threshold amount ($ˆ•,ƒƒƒ if •iling a joint return) and is phased in over a range (between $ˆ•,ƒƒƒ and $™•,ƒƒƒ for a joint return). The new rules provide guidance in two important areas for tool shops. First, the proposed regulations narrowly de•ine "reputation or skill of one or more employee" as income that is earned from endorsements, licensing of an individual's image, likeness, name, signature, voice, trademark or other symbol that is associated with an individual's identity or receiving appearance fees. Before the proposed regulations, some com- mentators would construe this provision in an overly broad way to include common activities for mold shops. However, this favorable de•inition is welcome news for mold shops. Second, a de minimis rule (or a rule for something that is too small or insigni•icant to be considered) has been proposed for mold shops that have both qualifying business income and SSTB income. For mold shops with annual gross receipts of $‚• million or less in a taxable year, the shop will not be an SSTB as long as less than ƒ percent of its gross receipts are attributable to the performance of services in an SSTB. For mold shops with annual gross receipt greater than $‚• million, the shop will not be an SSTB as long as less than •

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