What You Need to Know About Section 199A Deduction

Eric Dorenkott, CPA

As we move into Q4, now is the time to begin year-end tax planning.

The new Section 199A may be the most radical change of last year’s historic tax reform bill, and one not to be overlooked. Section 199A gives a 20 percent deduction of qualified business income to pass-through entity owners. The deduction has two components.

  1. Eligible taxpayers may be entitled to a deduction of up to 20 percent of qualified business income (QBI) from a domestic business operated as a sole proprietorship or through a partnership, S corporation, trust or estate.
  2. Eligible taxpayers may also be entitled to a deduction of up to 20 percent of their combined qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income.

The IRS has recently issued guidance on how the new deduction will be applied to taxpayers. Available for tax years beginning after December 31, 2017, here’s what you need to know:

  • How does this apply to multiple trades or businesses? Separate trades or business will generally remain separate for tax purposes unless aggregated by the taxpayer. Taxpayers may aggregate their businesses if certain requirements are met.
  • How is Qualified Business Income (QBI) defined?According to the IRS, QBI is the net amount of qualified items of income, gain, deduction and loss from any qualified trade or business. In addition, the items must be effectively connected with a U.S. trade or business, and items such as capital gains and losses, certain dividends and interest income are excluded.
  • What businesses qualify? Individuals, trusts and estates with qualified business income, qualified REIT dividends or qualified PTP income may qualify for the deduction, however, Section 199A does not universally apply to all service businesses.
  • Are there exceptions? Specified service trade or business (any business involving the performance of services in the fields of health, law, consulting, athletics, financial services, brokerage services, or “any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners”) and Performing services as an employee.
  • Are there any income limits?The deduction is available to taxpayers whose 2018 taxable incomes fall below $315,000 for joint returns and $157,500 for other taxpayers.
  • Taxpayers with multiple business that qualify for the deduction will have to net business losses against business income to determine QBI, whether or not those businesses qualify for aggregation and whether or not the taxpayer actually chooses to aggregate them. Losses carry forward until they are used, so generating a large loss may not be as beneficial. When losses are suspended for either at-risk rules or passive activity rules, they are also suspended for QBI purposes.

Do you have other questions about Section 199A? Do you want to know if you qualify? Reach out to us!