199(A) Case Study #3 – Side Gig Effect

[This post is part of a multi-part series on the new 199(A) deduction.  Be sure and check out our blog during the second week of each month to see the next case study. If you are looking for the basics of what this deduction is, please check out this post.]

 Today’s case study is going to look at how the 199(A) deduction varies depending on the type of business being operated.

Facts:

  • Husband and wife file a joint return.
  • Husband is an employed physician earning $750,000.
  • Wife currently stays at home, but she would like to start a business.
  • She has two ideas, which will both bring in net profits of $50,000.
    • Idea #1 is to start a bookkeeping and tax preparation business.
    • Idea #2 is to build and refinish wood furniture. To operate this business, she will hire an assistant who will make $25,000 in a year.
  • They have itemized deductions of $50,000.

Implications:

Idea #1 won’t be eligible for the 199(A) deduction.  Bookkeeping and tax preparation is a specified service business under the accounting profession.  With their combined taxable income, they are over the phase-out limit for any specified service income to qualify.

Idea #2 will qualify for the 199(A) deduction.  Income of $50,000 from the business will result in a deduction of $10,000.  Since they are in the highest marginal tax bracket (37%), this deduction will save $3,700 in taxes.  If she didn’t hire the employee, then this business would be phased out of the deduction.

Takeaway:

Side businesses, no matter which spouse owns them, can be eligible for the 199(A) deduction.  To calculate the amount, it depends on overall income, the type of business operated, the amount of wages paid from the business, and the qualified property owned in the business.

Check out our other 199(A) articles in this series:
Case Study #1 – Marital Status Impact
Case Study #2 – Dual vs. Single-income Family
Case Study #4 – Overall taxable income limitations

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