At the beginning of April, Covisum rolled out four new features to the Tax Clarity®software. The new pass-through deduction feature is particularly important for advisors with certain clients who own small businesses. The update allows advisors to demonstrate the impact of the deduction for pass-through income and the phase-out of the deduction under the 2017 Tax Cuts and Jobs Act.
A recent article in Financial Planningsuggests that the 20% deduction for qualified business income on pass-through entities will provide substancial savings for clients. Over the next several years, small business owners could save an estimated $415 billion thanks to the new deduction.
For clients with a lifestyle business, a business well under the threshold for the phase out, there could be opportunities to stack Roth conversions or IRA withdrawals on top of their self-employment income and pay a rate that is considerably lower than expected.
However, the pass-through deduction is complex, and financial advisors will need to proceed with caution as they navigate the new landscape for their business owning clients who fall under this umbrella.