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Does Your Small Business Qualify for the 20 Percent Deduction?

Cliff Ennico on

If you're like most small-business owners, you are scratching your head trying to figure out the new small-business tax deduction.

The Tax Cuts and Jobs Act, which went into effect Jan. 1, offers a 20 percent deduction for "pass through" entities, such as partnerships, limited liability companies and subchapter S corporations.

Like all tax benefits, the deduction is designed to accomplish social-engineering goals as well as raise tax revenue for the government, specifically:

1) The current administration wants to bring manufacturing back to the U.S. so such businesses will have the easiest time qualifying for the deduction.

2) The current administration wants to encourage small businesses to hire more people as employees so those small businesses will have an easier time qualifying for the deduction than others.

Here are the five questions you will have to ask to determine whether you qualify for the 20 percent deduction:

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Step No. 1: Is Your Business a Pass-Through for Tax Purposes?

The 20 percent deduction applies only to pass-through entities, which are basically any entities (including sole proprietorships) other than C corporations. Hey, those guys got a HUGE reduction in their federal income-tax rate, so don't feel too sorry for them.

Step No. 2: Is Your Business Engaged in a "Specified Service Trade or Business"?

The 20 percent deduction applies only to small businesses engaged in manufacturing, retail, nonprofessional services (think restaurants and lawn care) and SOME professional services (such as architecture and engineering). Congress did not want the new deduction to enrich accountants and lawyers (but no fear -- the extra fees they will earn from helping clients figure out the deduction will more than make up for not having the deduction).

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