New Tax Deductions

When you file your 2020 tax return, don’t forget to consider the new tax deductions that were created when tax reform legislation was passed into law late in December 2017.

The following items, directed to those of you that have working interests associated with a trade or business operated individually, or through a pass-through entity, such as a partnership or S corporation, should be discussed with your tax preparer to gain the most tax savings benefits and to get more complete information about the change, which isn’t provided in this article.

First, the qualified business income (QBI) deduction, which has the potential of creating a deduction of up to 20% of taxable income, needs to be calculated.  Introduced by Congress to allow non-incorporated businesses and individuals operating a trade or business a deduction similar to the reduction in tax rate to 21% that was provided to corporations, the QBI deduction can be extremely easy to implement for individuals below the established taxable income thresholds.  If an individual taxpayer is below the taxable income threshold amount of $157,500 for a single taxpayer and $315,000 for a married taxpayer, the limitations and other restrictions for claiming the QBI deduction don’t apply.

In addition, depreciation changes were made to improve the opportunity to benefit from accelerated depreciation methods, particularly what is referred to as bonus depreciation. The percentage of property qualifying for bonus depreciation is now 100% for property acquired and placed in service, after September 27, 2017. Plus, rather than being limited to only “new” property items, bonus depreciation now also applies to “used” property, which can be a great benefit in oil and gas operations.

Also note, these changes are available to other trade or business operations, they are not restricted to owning minerals.

The tax reform changes created in 2017 were the most extensive in over 30 years, so there are many more items that probably will affect your tax return for 2018.  As a result, as stated before, make sure you discuss these and the other potential change items with your tax preparer to get the most tax saving benefits on your 2018 tax return.

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