What is Section 199A?
The Section 199A deduction for pass-through entities was signed into law as part of the Tax Cuts and Jobs Act (TCJA) of 2017. Just as the TCJA benefited C corporations by reducing the corporate tax rate, the new 199A deduction was created to provide similar tax relief for the nation’s small- and mid-size businesses by offering an up-to-20% deduction to pass-through entities.
How Does it Work?
In its simplest form, the deduction is calculated off a specific income threshold for the taxpayer. If the taxpayer’s taxable income for the year is less than the $315,000 threshold ($157,500 for single filers), then the new deduction is calculated by the lesser of:
- 20% of qualified business income (QBI) or
- 20% of the overall taxable income of the individual
QBI is the net amount of qualified items of income, gain, deduction, and loss connected to a qualified U.S. trade or business. Think of it as the regular, non-investment income brought in by a business (within the U.S.). Only items included in taxable income are counted.
When a taxpayer’s income exceeds the threshold, certain limitations apply. If this occurs, the deduction will be limited to the lesser of:
- 20% of the taxpayer’s QBI or
- The greater of:
- 50% of W-2 wages with respect to the business or
- 25% of W-2 wages with respect to the business, plus 2.5% of the allocable share of unadjusted bases of all qualified property
Additionally, the business must not be considered a “specified service trade or business” (see below) and must either pay wages or own property. Taxpayers with taxable income below the threshold are not subject to limitations on the deduction and are not prevented from claiming the deduction on specified service trade or business income.
Who Can (and Can’t) Claim Section 199A?
Section 199A allows for an up to 20% deduction from pass-through income for a domestic business that operates as either a:
- Sole proprietorship
- S corporation
The deduction is also allowed for the combined income of qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income.
As a rule, pass-through income from a specified service trade or business (SSTB) is excluded from the deduction, unless the taxpayer’s taxable income is below the aforementioned thresholds for joint and single filers. In general, an SSTB is defined as any trade or business performing services in one or more of the following fields:
- Actuarial Science
- Performing Arts
- Financial Services
- Brokerage Services
- Investing and Investment Management
- Dealing in Securities, Partnership Interests, or Commodities
- Any trade or business where the principle asset of such trade or business is the reputation or skill of one or more of its employees or owners.
Neither corporations nor employees can claim a QBI deduction.
WNDE Section 199A Services
While the above information provides a general overview of the 199A pass-through deduction, the deduction is subject to a number of further regulatory guidelines and limitations. The 199A deduction is a valuable and worthwhile proposition for any qualifying entity to pursue, but it is a complex provision that requires a deep understanding of the new law. We strongly urge you to consult a knowledgeable tax advisor in order to address making changes to your tax planning strategy.
WNDE’s team of tax professionals are thoroughly versed on Section 199A requirements. We are prepared to guide your organization in taking the most advantage of this tax deduction.