Figuring Out the New 199A Deduction

Figuring Out the New 199A Deduction

If section 199A is entirely new to you, don’t worry! The Internal Revenue Service (IRS) released a new document earlier this month that breaks down some of the new specifics around the rules created for section 199A. In short, this complex section refers to a part of the tax code that mentions a newly created deduction of up to 20 percent of qualified domestic business income (QBI) for pass-through entities such as sole-proprietorships, partnerships, S-corporations, trusts, or estates. As mentioned above, this section is complex, but the newly released regulations have clarified many of the questions brought up by the original legislation.

Similar to other provisions of the Tax Cuts and Jobs Act (TCJA), the rules for 199A are now in effect for the 2018 tax year. Unless further congressional action is taken, this particular deduction will expire in 2025. 199A allows business entities to take up to a 20% deduction of their QBI. Determining whether or not your business actually qualifies for this deduction can be difficult. As of now, it only applies to pass-through entities. The deduction is also dependent on some other factors of your business (business activities, wages paid, etc.), so it’s important to be prepared with the correct information as you prepare to file your taxes.

Only businesses that are considered a section 162 business qualify for the 199A deduction. For section 162 businesses, the owner must be involved hands-on with business activities on a consistent basis. Essentially, if you think you’re running a business, you are usually involved enough to meet that qualification. However, if your business is based on rental property, this becomes a more complicated situation. In Revenue Procedure 2019-7, the IRS claims that rental property is a qualified business if 250 hours or more of rental services are provided for the year and separate books and records are kept for each rental. Therefore, you don’t qualify and lose the deduction if you use the rental for yourself more than two weeks of the year. To further complicate the determination, the IRS requires you to handle each business (even ones operating under the same legal entity) separately with the ability to calculate a QBI for each individual business.

It is also important to know the business owner’s taxable income. Most business owners are estimated to have incomes that fall below these limits, but if the business owner’s income falls above the thresholds listed below, the next matter is determining whether the business is a specified service trade or business (SSTB).

 

Income Thresholds for Business Owners

Single

2018: $157,500 – $207,500

2019: $160,700 – $210,700

Married Filing Jointly

2018: $315,000 – $415,000

2019: $321,450 – $421,450

 

As this is a new deduction as part of the TJCA, there are still many questions about how it all works when filing tax returns. In the future, this particular deduction will likely require the assistance of a professional during tax season. With any new tax laws in effect, it’s important to work with the B&Y tax professionals to guarantee that you’re maximizing your tax savings from year-to-year.