On December 24, 2017, President Trump signed the Tax Cuts and Jobs Act (see http://bit.ly/2jZX47p) into law (hereinafter the “Tax Cuts Act”). While there has been much debate as to what effect the Tax Cuts Act will have on the real estate market in general, one thing that is certain, is that the new law will certainly have a positive impact on the tax implications on the income of many real estate agents. In August, 2017, the potential impact of the restructuring of the tax code and the benefits of setting up a limited liability entity such as an s-corporation (“S-Corp”) or limited liability company (“LLC”) were discussed in the Real Estate In-Depth article entitled “Agents, Associate Brokers Could Benefit from Commission Via ‘Pass-Through’ Biz Entities” (the “August 2017 Article”) (see http://bit.ly/2mDq45j). However, with the passage of the Tax Cuts Act, there have been additional changes to the tax code that will not, at least from a tax perspective, require many real estate agents to rush to form a S-Corp or LLC.
The Tax Cuts Act: Qualified Business Income and the “Sole Proprietor”
The Tax Cuts Act reduces the income tax due on “qualified business income” (“QBI”) from a qualified trade or business that is earned not only by an estate or trust, a partnership, corporation (C-Corporation or S-Corp), or LLC, but now, even a sole proprietorship (which is the manner in which many individual real estate agents currently do business). The new law creates a new deduction (rather than a specific tax rate) of up to twenty (20%) percent of the QBI of an individual. The Tax Cuts Act also greatly reduces the existing corporate tax rate (i.e., for C Corporations) from thirty (35%) percent to twenty-one (21%) percent.
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