Time to do some active planning to beat the passive income tax changes
Small businesses who earned over $50,000 in passive income in the past year may no longer qualify for the small business deduction (SBD). Some business owners will be affected, but all should take note of the changes. One way to prevent the loss of this deduction if your “adjusted aggregate investment income” (AAII) is close to or exceeding the threshold, is to withdraw funds that would have been invested or invest in growth potential rather than interest earnings. Life insurance and pension plans can also be utilized to limit the amount. Whatever you choose to do, start planning now.
- The loss of the small business deduction will go into effect in 2019 for corporations with more than $50,000 in passive investment income from 2018.
- Currently, the small business deduction allows for a low rate of corporate tax on the first $500,000, which is known as the SBD limit, for active business income per year.
- Under the new rule, the SBD limit will be reduced by $5 for each $1 of AAII that exceeds $50,000 and will reach zero once $150,000 of AAII is earned in a year.
“If you are going to take the after-tax business income out of the company in the year it’s earned, then you’re not enjoying any tax deferral and the loss of the SBD is likely immaterial.”