Section 199A deduction also known as the Qualified Business Income Deduction (QBID) was created by the 2017 Tax Cuts & Jobs Act. This new code section is a significant tax break for qualifying small business owners. However, this 20% deduction, is saddled with exclusions, phase-outs, technical issues, and uncertainties that may limit business owners the full benefit of this new deduction.
In general, the 20% deduction can be claimed by the owners of S Corporations, Partnerships, Sole Proprietorships, and even the beneficiaries of trusts.
The Qualified Business Income Deduction is fairly complicated with many nuances with the following being an overview of the new deduction.
The amount of the deduction determined under section 199A with respect to any qualified trade or business is the lesser of:
(A) 20 percent of the taxpayer’s qualified business income with respect to the qualified trade or business, or
(B) the greater of
(i) 50 percent of the W-2 wages with respect to the qualified trade or business, or
(ii) the sum of 25 percent of the W-2 wages with respect to the qualified trade or business,
plus 2.5 percent of the unadjusted basis immediately after acquisition of all qualified property
Two of the primary definition needed for the calculation are who qualifies as a trade or business and what qualified business income is. After determining that your business qualifies for the deduction, you must work through the calculation including the exclusions. Finally, you must determine if the benefit will be limited.
Exclusions, Phase Outs & Technical Issues
A Taxpayer cannot deduct more than 20% of their taxable income after subtracting your net capital gains, but before deducting the section 199A deduction;
The section 199A deduction is effective beginning January 1, 2018, and ending December 31, 2025.
The section 199A deduction reduces your taxable income subject to federal taxes but does not reduce self-employment taxes or alternative minimum taxes.
To take advantage of this deduction, you must meet the definition of Qualified Trade or Business. However, these definitions as to what trade or business is still to be determined. The following trades or business do not in general qualify: Health, Law, Accounting, Consulting, Athletes, Financial Services, Investing, Trading, Dealer Securities, 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 or owners. The IRS recently published Proposed Regulations to clarify these trades and business to provide guidance as to a qualifying trade or business.
The section 199A deduction is phased out so that a taxpayer will lose the benefit of the deduction based on taxable income including all sources of income.
Single is $157,500 completely phased out by $207,500 (adjusted for inflation)
Married filing jointly is $315,000 completely phased out by $415,000 (adjusted for inflation)
Taxable income between the ranges allows for a partial deduction
This new tax provision may be a significant tax benefit for those that qualify and are not limited by the income phaseouts. We have already begun working with clients to determine if they will qualify for the deduction and what exclusions or phase out may affect them from fully utilizing the new deduction. Please reach out to us to schedule an appointment to see what benefits of this new deduction may apply to you.