Small Businesses Have a New Tax Break, but There Are Many ‘Ifs’

Not necessarily, though.

If you pay wages to employees, including yourself, you could be eligible to take a qualified business income deduction equal to 50 percent of those wages, even if your income exceeds the threshold. In any case, the deduction cannot be more than 20 percent of qualified business income.

If your head isn’t spinning yet, there is more: An alternative calculation allows real estate firms to claim a qualified business income deduction of 25 percent of wages and 2.5 percent of the amount invested in property. But that’s only available if the I.R.S. deems the enterprise an eligible business. The agency last month ruled that renting out property is a business for which the deduction applies, and is not just a passive investment, under certain circumstances. Separate books and bank accounts must be kept and 250 hours a year must be devoted to active management, the agency said.

There’s still more fine print. The deduction is out of bounds to anyone who has income above the threshold and runs what the law calls a “specified service trade or business.” That’s one whose main asset is the owners’ reputation and skill.

The law lists several examples, including health, law, financial services, entertainment and consulting. Those businesses don’t qualify for the deduction. But for some reason, architecture and engineering do.

In the batch of rules released last month, the I.R.S. acknowledged that some activities can go either way, such as the operation of a pharmacy. The question for pharmacies is whether owners are regarded as dispensing health care. The I.R.S. said it depended on the circumstances.

Ian Shane, a partner at the law firm Michelman & Robinson, said: “As these final regulations are put into effect by tax practitioners, I am confident that there will still be a substantial number of gray areas where it comes down to anybody’s guess as to whether the activity or type of business will qualify for the deduction in the eyes of the I.R.S.”

Mr. Shane highlighted some “interesting anomalies.” One is whether a business engages in consulting, which disqualifies it for the deduction. Providing training courses or related services qualifies for the deduction, but providing advice and counsel — which can be part of training — constitutes consulting, in the agency’s view. What a business puts on its invoices and how it has represented itself over the years will go a long way to determining how it’s regarded, he said.

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