One of the changes ushered in by the Tax Cuts and Jobs Act is a new deduction on a personal tax return for pass-through business owners, called the 199A deduction. For these individuals, the deduction could provide up to a 20 percent tax deduction for qualified business income. The deduction also applies to trusts that own an interest in a pass-through entity. Although the deduction might sound fairly straightforward, calculating it can be a complicated endeavor.
Think you could benefit from the 199A deduction? Here are several factors to consider.
What is your business entity?
The 199A deduction allows pass-through business owners to deduct up to 20 percent of their qualified business income. Qualified business income is—by and large—your ordinary business income. Pass-through businesses include S corporations, partnerships, single-member limited liability companies (LLCs), and so on. Basically, the 199A deduction applies to businesses that are not organized as C corporations, including sole proprietors.
Is your business a specified service trade or business?
If your business is a specified trade organizations financial statement audit service or business (SSTB), the 199A deduction is phased out based on your personal federal taxable income level. Generally speaking, the Internal Revenue Code defines SSTBs as businesses in the fields of healthcare/medical, law,business accounting , actuarial science, performing arts, consulting, athletics, financial services, brokerage services, investing and investment management, and trading. Businesses in trading and dealing with securities, partnership interest, and commodities, or based on the reputation and skill of one individual, such as a social media “influencer,” also fall into the SSTB category. Architects and engineers are not considered an SSTB.
What’s your income level?
The 199A deduction is phased out between the taxable income range of $315,000 and $415,000 for married filers filing jointly, and between $157,600 and $207,500 for other filers (including trusts). If your income exceeds the top range and your business is an SSTB, you will not be able to take advantage of the 20 percent deduction. If your business is not an SSTB, the deduction cannot be phased out; however, the 199A limitation applies. In this case, you can still take the deduction as long as your business has unadjusted basis of qualified property and/or W-2 wages. The math to calculate the total amount of the deduction gets complicated.
Additional factors to consider:
After all the calculations are done, the 199A deduction cannot be higher than 20 percent of your adjusted taxable income. If you have several businesses, the deduction is calculated separately for each business. If your businesses meet certain requirements, however, there’s an option to aggregate. In some cases, this could provide you with a higher deduction. Again, it’s complicated.
Planning is critical.
Determining if and how you could benefit from the 199A deduction could take time. In certain situations, it may be advantageous to change entities or explore ways to reduce your taxable income. Acting sooner rather than later can help you make the most of any tax benefit the 199A deduction could provide.
Contact your PWB advisor today.
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