Section 199A Creates New Planning Opportunities for Business Owners

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Dec 04, 2018

By Barry Frantz, EA Partner at Terry Lockridge & Dunn

The Tax Cuts and Jobs Act of 2017 brought the largest changes to both individual and corporate taxes that we have seen in the past 30 years. Included in those changes was IRC Section 199A, which permits business owners to deduct up to 20% of the “qualified business income (QBI)” earned in their “qualified trade or business.”

Here are the basics of Section 199A:

  • Deduction can be generated by all U.S. businesses, other than C corporations, which includes sole proprietorships, LLC’s, S corporations, partnerships, and trusts
  • QBI must be generated from a qualified trade or business
  • Deduction is claimed by individuals, trusts, and estates
  • Effective for tax years beginning after December 31, 2017, and before January 1, 2026
  • Deduction is equal to the lesser of 20% of QBI from the business or 20% of taxable income of the taxpayer before the QBI deduction
  • Taxpayers with taxable income exceeding $157,500 (single) or $315,000 (married filing jointly) are subject to a W-2 wages and capital asset limitation, which phases out over the next $50,000 (single) or $100,000 (MFJ)
  • QBI deduction by a “specified service businesses” phases out under the same income limitations and is not allowed if taxable income is over $207,500 (single) or $415,000 (MFJ)
    • Specified service business is defined as “any trade or business involving the performance of services in the fields of health, law, accounting, financial services, brokerage services, or any trade or business where the principal asset is the reputation or skill of one or more of its employees”

Section 199A can provide a sizable tax deduction for business owners; but, as you can see, the new deduction is highly complicated. However, where there is complication, there are planning opportunities, especially when the taxable income of business owner reaches the income threshold limits. Some of the planning strategies are:

  • Income reduction strategies – increase deductions and retirement plan contributions, minimize portfolio income
  • Business strategies – review entity structure, revisit compensation model, revisit business assets
  • Filing strategies – If you are married with one spouse having high wages and the other spouse as a business owner in a specified service business with QBI of $157,500 or less, you could potentially file separately so the business owner spouse becomes eligible for the QBI deduction

If you are a business owner and would like to discuss Section 199A as it pertains to your business, please contact the accountants at Terry Lockridge & Dunn to review your tax situation and tax planning options before the end of 2018. They can be reached at 319-364-2945 in Cedar Rapids, or 319-339-4884 in Iowa City.