Section 199A Business Tax Deductions
A deduction intended for pass-through business owners.
Many households, businesses, and other organizations are arranging their documents for the coming tax season. The changes to the tax code have inspired a great deal of discussion, confusion, and clarification.
Something you might want to know as a business owner: There’s a new tax cut that many may not be aware of, but it’s worth some consideration.
When the Tax Cuts and Jobs Act was signed into law in late 2017, the 199A deduction came into being. This section allows a limited tax deduction of up to 20% of qualified business income for owners of pass-through businesses—namely, S corporations, partnerships, and limited liability companies (LLCs). The 199A deduction does not apply to a regular corporation, however.[1,2]
Remember, the tax law changes listed here are for informational purposes only and are not a replacement for real-life advice. Make sure to consult your tax, legal, or accounting professional before modifying your tax strategy.
Like many other deductions, there are phaseout ranges in place. For those filing jointly, the phaseout range is $315,000 to $415,000; for single filers, $157,500 to $207,500. The same ranges are in place for non-specified service businesses, but represent a “phase-in” range, requiring the taxpayer to calculate a deduction for qualified business income.[1,2]
That deduction, should you reach the phase-in range, is determined by the lesser of two sums:
The first 20% of qualified business income, 20% of dividends received from qualified real estate investment trusts (REITs), and the same percentage of qualified income earned from a publicly traded partnership (PTP)
20% of your taxable income, with net capital gains subtracted.
This deduction could be limited if your business is a specified service trade or business (SSTB), or depending on the amount of W-2 wages paid out, or the unadjusted basis of qualified property.[2]
For example, The Tax Advisor, a publication of the American Institute of CPAs, considers the hypothetical situation of a married taxpayer. They have $100,000 in long-term capital gain, the same amount in qualified business income, and $30,000 in deductions. The total taxable income may be $170,000. In this situation, the 199A deduction may be either the lesser of $20,000, which is 20% of $100,000, or $14,000, which is 20% of $70,000 (that’s the excess of taxable income of $170,000 over the net capital gain of $100,000).[3]
These ranges will be adjusted for inflation over time. The 199A deduction is set to expire in 2026.[1,2]
Too complex? If you haven’t heard of this tax deduction, you aren’t alone. The Tax Cuts and Jobs Act offered many changes and new deductions, and not all of them received widespread coverage. Some business owners have found the pass-through deduction law confusing, which might also help explain its relative obscurity. Not everyone feels that the deduction has staying power.[1]
Still, the confusion regarding this and other tax matters underlines the importance of seeking and securing capable and reliable assistance. That may be important for both you and your business and a few friendly conversations with your financial advisor or tax professional could prove helpful.
This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
Citations
1 - forbes.com/sites/jamiehopkins/2018/07/24/new-tax-deduction-199a-will-be-lost-for-many-in-2018/ [7/24/18]
2 - irs.gov/newsroom/tax-cuts-and-jobs-act-provision-11011-section-199a-qualified-business-income-deduction-faqs [11/5/18]
3 - thetaxadviser.com/issues/2018/apr/understanding-sec-199A-business-income-deduction.html [4/1/18]
Parkshore Wealth Management is a family-owned, independent, fee-only Registered Investment Advisor serving the greater Sacramento area with an office in Roseville, CA. We partner with financially responsible individuals and families who are eager to take positive steps that will allow them to use their money to build the life they desire. The firm is led by Harold Anderson, CFP®, and Daniel Andersen, CFP®, both members of NAPFA, the country's leading professional association of fee-only financial advisors.