199A – The Basics

In last year’s Tax Cuts and Jobs Act, Congress lowered the corporate tax rate from 35% to 21%.  To level the playing field for pass-through businesses, they created a new deduction.  The goal of this post is to explain the basics of this deduction, so that you can learn how it may apply in your situation. In upcoming posts, we will look at the details of some real cases to help you understand how the different elements of 199A may affect you.

What is the name of this deduction?
You may hear this deduction referred to as one of a few things.  These include the 199A deduction, pass-through entity deduction, and qualified business income (QBI) deduction.  All of these names are referring to the same thing.

What is the deduction?
In the simplest of circumstances, this deduction allows you to reduce taxable income by 20% of your qualified business income.

Who is eligible for the deduction?
The deduction applies to the income of pass-through entities, which include sole proprietorships, partnerships, and S-Corporations.  If your LLC is taxed as one of those entities (most are), then you are eligible as well.  The deduction will be taken on the owner’s individual, trust, or estate tax return.

Are there any types of businesses that don’t get the deduction?
If you are a high income taxpayer and own a specified service business, your deduction will be phased out.  Specified service businesses include those in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, and brokerage services.

My business isn’t a specified service business, but I am high income.  Will my deduction be limited?
Yes, it could be limited.  The limits involve the amounts of your company’s W-2 wages and unadjusted depreciable property.  These limits are phased in and can limit your deduction if these amounts aren’t high enough.

What are the specific limits related to W-2 wages and property basis?
If this limit applies, then your deduction will be limited to the higher of 50% of W-2 wages or 25% of W-2 wages plus 2.5% of unadjusted basis of all qualified property.

When you say high income, what levels are included?
For a single taxpayer, the phase in/out starts at taxable income of $160,700 and ends at $210,700.  For a married filing joint return, the phase in/out starts at $321,400 and ends at $421,400. (2019 amounts)

Are there any limits if my income is low?
Yes, your deduction can’t exceed 20% of taxable income.

199(A) Case Study #1: Marital Status Impact

Planning to Maximize Your 199A Deduction

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