The IRS has released proposed regulations for the new Qualified Business Income Deduction that was part the tax law change passed in 2017. Realtors have been exempted from the Specified Service Trade or business limitations on the business income deduction. This means that realtors can deduct up to 20% of their qualified business income in computing their net income for tax purposes.
For incomes up to $ 315,000, the calculation is simple. Take 20% of the net income from Schedule C or net k-1 income if practicing as a partnership of subchapter S corporation. The limitation is 20% of taxable income ( minus net capital gains and qualified dividend income). And that’s it.
For incomes over $315,000 but not over $ 415,000 there is a phase in of the W-2 wages paid limitation ( explained next)
For incomes over $ 415,000 the deduction is 20% of qualified business income and the same 20% taxable income limit, but now there is an additional limit of 50% of wages paid within the business.
Net income from real estate brokerage on Schedule C $ 250,000
Taxable income 265,000
Qualified business income deduction $ 125,000
Since taxable income is greater than the business income, the deduction
Net income from real estate brokerage on Schedule C $ 600,000
W-2 wages paid to employees (could include wages paid to spouse) $ 200,000
Taxable income $ 604,000
20% of $ 600,000 $ 120,000
50% of wages $ 100,000
Qualified business income deduction is limited
To 50% of wages and therefore is $ 100, 000
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