Impact of the new 20% Pass-through tax deduction for Coaches
Note: I am neither a CPA nor a qualified tax consultant. So, anything in this article should be treated as informational only.
If you are a coach and are filing your income as a LLC or a Sole-Proprietor, you are probably wondering how the Tax Cuts and Jobs Act Pass-through deduction affects your taxes for 2018. The official IRS text for the deduction can be found here. What I have attempted here is to simplify it down to a quick summary:
The official name for this deduction is Tax Cuts and Jobs Act, Provision 11011, Section 199A - Qualified Business Income Deduction. It is popularly known as the Pass-through deduction
The Tax and Jobs Act reduced the corporate tax for 'C' corporations to a flat 21%. Since more than 90% of the businesses report their business income on their personal tax return and are not a 'C' corporation, the Pass-through deduction was introduced to give these businesses a similar break. It is pretty awesome actually!
This deduction allows you to take a straight deduction of "up to 20%" of your Qualified Business Income. What is Qualified Business Income? Read on. Why "up to 20%" ? Well, laws are never simple :-) So, read on...
A Qualified Business Income is an income that you received through your coaching business. So, this does not apply to you if you are an internal coach working for a company and receiving salary. Essentially, if you get a 1099-Misc for your coaching services, that is considered a Qualified Business Income(QBI). You don't need a LLC to use it. (There are some others which also constitute a QBI but you would be better off reading the IRS link above to learn about those.)
So, if you made $100,000 in coaching income in 2018, is that your final QBI? Mostly no. IRS says that you have to deduct any expenses, losses etc. from it and whatever remains is your QBI. So, let's say that your business spend was $5,000 and you had to write off some client non-payment of about $1,000. Then, your QBI would be $100,000 - $5,000 - $1,000 = $94,000.
Ok. I understand QBI. What about the "up to 20%" deduction? Stay with me. If you are filing single and your total taxable income does not exceed $157,500 ($315,000 if married and filing jointly), you can take a straight 20% deduction off your QBI. So, let's say you are filing single and you had an additional income of $30,000 through a dividends and interest come, then your total taxable income would be $30,000 + $94,000 (QBI) = $124,000. Since this is less than $157,000, you can take a straight 20% deduction off the $94,000 QBI. So, enjoy the deduction of $18,800 and you can skip the rest of the article!
So far so good. So, when does the full 20% not apply? Good question. If your total taxable income exceeds the thresholds above, then IRS has made it a bit of fun for you to navigate. Stick with me Coaches. IRS says that if your total taxable income exceeds the thresholds above, the deduction could be anywhere between 0% and 20% depending on whether your business is a "Specified Service Trade or Business" (SSTB) or not. If it is not a SSTB, you're good. You can use the flat 20% deduction. If your business is a SSTB, then there are certain limits.
So, is "Coaching" defined as a SSTB? IRS defined SSTB as "a trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, investing and investment management, trading, dealing in certain assets or any trade or business where the principal asset is the reputation or skill of one or more of its employees." The closest that Coaching can come to is "consulting". Although Coaching and Consulting are two very different things in actuality, IRS probably sees them as one. One would never know till IRS provides any further guidance. So, if your income is above the thresholds, then the SSTB clause could apply to you. One could also argue that "dealing in certain assets or any trade or business where the principal asset is the reputation or skill of one or more of its employees" also applies to coaching. However, the law clarified that this refers to celebrities getting income for product endorsements because of being a celebrity. So, coaches are off the hook on that one :-)
Hopefully this gives you some clarity on what the implication of this deduction are for your coaching business. Here's to a fun April 15th, 2018!