The National Association Of Realtors Has A Herd Of Attorneys Analyzing The Tax Cuts & Jobs Act
There is some good news for agents who qualify as independent contractors or pass-through business owners with personal service income.
Here Is An Excerpt From Their Latest Article On The Subject:
“Major Provisions Affecting Real Estate Professional”
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 normally 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 of less 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 income range of $100,000 for couples.
- For those with non-personal service incomeabove 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 of 25% 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.
The House and Senate started out with significantly different approaches to lowering the tax rate on qualified business income from sole proprietors and pass-through entities. The House bill featured a top rate approach while the Senate offered a deduction, which was set at 23% in the Senate bill. The House approach offered flexibility in allowing businesses with significant capital invested or wages paid. The final provision reflects a compromise between the different approaches. The provision generally follows the Senate proposal, but, at the request of the House, includes an additional factor related to the level of capital investment in the business.
Andy Agent is married to Emma Employee and they have two dependent children. For 2018, Andy earns $45,000 of net commission income while Emma earns a salary of $45,000. They have itemized deductions of $18,000, which are comprised of mortgage interest, state and local taxes, and charitable contributions.
Prior Law. Under the prior law, Andy and Emma would pay ordinary income tax rates on their total taxable income. Assuming they have no other income, their federal income tax for 2018 would be computed as follows:
|Net commission income||$45,000|
|Personal exemptions (4 x $4,150)||($16,600)|
|Tax credit for children||$ 2,000|
|Net tax after credits||$ 5,358|
Note: Andy and Emma are in the marginal tax rate bracket of 15% under the prior law.
New Law. The new tax law would provide a 20% deduction for Andy’s net commission income so long as his and Emma’s total taxable income does not exceed $315,000, even though the business income is derived from personal services (because of the personal service income exception). This deduction would reduce Andy and Emma’s taxable income by $9,000 ($45,000 x 20%). Their tax under the new law would be computed as follows:
|Net commission income||$45,000|
|Business income deduction (20%)||($ 9,000)|
|Tax credit for children||$ 4,000|
|Net tax after credits||$ 2,459|
Tax Difference Under New Law. The business income deduction would save Andy and Emma $1,080 ($9,000 x 12%, since they are in the 12% marginal tax bracket).
Their total tax reduction compared with the prior law is $2,899 ($5,358 – $2,459).
Check Out The Article
You can get 29 pages of NAR Tax ideas by going to https://www.nar.realtor/tax-reform/the-tax-cuts-and-jobs-act-what-it-means-for-homeowners-and-real-estate-professionals#Example%202