As tempting as the 20 percent deduction is for small businesses, entrepreneurs should proceed with caution and be ready for the possibility that the IRS could challenge your deduction. Here’s how to proceed:
• Keep well-documented books and records. Be sure to closely review the receipts and statements that pertain to your business, and prepare to turn these in to your accountant.
If you’re hoping to claim the deduction for a property you rent out and do so under the safe harbor, the IRS will want to know how much time you spent on maintenance, management and more.
• Think before making dramatic changes to your business. Last summer, the IRS put the kibosh on aggressive strategies accountants pitched to help entrepreneurs qualify for the break.
The qualified business income deduction is still a work in progress — and it’s only around until the end of 2025 — so slow down before doing anything too drastic.
“The well-advised client will view this as another data point to reevaluate their structure and business,” said Jonah Gruda, CPA and partner at Mazars USA. “But I always tell them that while tax is an important aspect of business decisions, it’s only an aspect.”
• Talk to your accountant. Do a gut check of your appetite for the deduction, and prepare for the possibility that you may have to make your case to the IRS.
“There are gray areas where it’s a matter of your tax risk tolerance,” said Levine of Blueprint Wealth Alliance. “Are you a fighter, or are you going to say, ‘I have bigger things to worry about’?
“I have clients in both camps,” he said.
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