Ref: HR 1, Tax Cuts and Jobs Act

First read our article regarding non-service businesses.

Service business: Any trade or business in the fields of health, law, consulting, athletics, financial services, brokerage services, OR any trade or busineess where the principal asset of such trace or business is the reputation or skill of one or more of its employees or owners.  The IRS will cast a wide loop here. We’ll be waiting for regulations more specific to this definition.

This is a highly complex calculation.  Your starting point is the calculation as if the business was not a service business (see prior article).

Individual return taxable income:  If your individual return is as follows, further restrictions may apply:

Joint filers taxable income under $315,000 (no further restrictions)

Joint filers taxable income over $415,000 (no pass-through deduction allowed)

Joint filers taxable income between $315k and $415k: A complex set of nested calculations must be executed to determine the allowable pass-through deduction.

Single filers:  The above amounts are replaced with $157,500 (no limitation); $207,500 (no pass-through deduction); and between $157,500 and $207,500 the complex set of nested calculations.

Example: A sole proprietor filing as a single male has net income of $187,500 from his service business.  There is no wage limitation (see prior article for non-service businesses).  After the complex nested calculations, his deduction is NOT 187,500 * 20% = $37,500.  With the service business limitations, the deduction in this case is $12,000.

Due to the very complex nature of this calculation, each tax situation will have to be carefully calculated separately.