business is the reputation or skill of one or more of its employees
or owners.”
It seemed clear that most real estate agents and brokers
would be considered in a personal service business and would
thus not normally qualify for the 20 percent deduction.
However, NAR advocacy efforts helped to secure a major
exception (the personal service income exception) in the final law
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
percent 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 income above these
thresholds, the law provides a second exception that may still
allow a full or limited 20 percent deduction. This second exception
(the wage and capital limit exception) places a limit on the
deduction of the greater of:
• 50 percent of the W-2 wages paid by the business, or
• The total of 25 percent of the W-2 wages paid by the business
plus 2.5 percent 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
percent 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 percent 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 percent deduction,
but that deduction may be limited by the wage and capital
limit exception.
SECTION 179 EXPENSING
The law 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 law 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 law 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 law 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 consumed by employees on work travel).
> Source: NAR
TAX REFORM
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