Tax Cuts & Jobs Act and Section 199A
For taxable years beginning after December 31, 2017 and before January 1, 2026, non-corporate taxpayers (individuals, trusts, and estates) may take a deduction equal to 20 percent of Qualified Business Income (QBI) from partnerships, S corporations, and sole proprietorships.
QBI includes the net domestic business taxable income, gain, deduction, and loss with respect to any qualified trade or business.
The deduction is available without limitation to individuals as well as trusts and estates where taxable income is below $157,500 if single and $315,000 if married filing jointly. There is a phase-out when taxable income from all sources exceeds $157,500 to $207,500 for single filers and $315,000 to $415,000 if married filing jointly. The deduction is 20 percent of the qualified business income, further limited of 20 percent of taxable income.
For example: Amy is a small business owner and files a schedule C.
- Amy made $100,000 net income from her business in 2018.
- Amy files a single return and her taxable income is $70,000.
- Amy’s Sec. 199A deduction is 20% of $70,000, or $14,000.
QBI is determined for each trade or business of the taxpayer. The determination of accepted trades takes into account these items only to the extent included or allowed in the taxable income for the year. This figure cannot be deducted on the business return. There are two different categories in which trades and business can classified, Specified Service and Qualified.
Specified service means any trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, including investing and investment management, trading, or dealing in securities, partnership interests, or commodities, and 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. Engineering and architecture, originally included as specified service trades or businesses, were omitted in the final version of the TCJA.
Qualified means any trade or business other than a specified service trade or business and other than the trade or business of being an employee. Industry types include manufacturing, distribution, real estate, construction, retail, food and restaurants, etc.
The Section 199A deduction for individuals above the taxable income threshold is limited to the greater of either:
- 50 percent of the taxpayer’s allocable share of W-2 wages paid by the business, or
- 25 percent of the taxpayer’s allocable share of W-2 wages paid by the business plus 2.5% of the taxpayer’s allocable share of the unadjusted basis immediately after acquisition of all qualified property
Taxpayers should run the numbers through both provisions to ensure they received the best possible deduction.
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