One of the most complicated yet compelling provisions of the recently enacted tax reform is the addition of §199A to the Internal Revenue Code. Continue reading to hear from Morris Law Group's top tax attorneys on the issue.

Opportunities for New Deductions Under 199A

§199A provides a deduction for business owners of pass-through entities (non-corporations). Subject to the thresholds and exceptions described below, §199A permits such pass-through business owners to deduct up to 20% of their qualified business income. 

The section specifically provides that taxpayers other than corporations shall be allowed a deduction for each taxable year (after 2017) equal to the sum of:
  • The lesser of (A) the taxpayer’s “combined qualified business income amount;” or (B) 20% of the excess of the taxpayer’s taxable income for the taxable year over any net capital gains plus the aggregate amount of qualified cooperative dividends, plus
  • The lesser of (A) 20% of the aggregate amount of the qualified cooperative dividends of the taxpayer for the taxable year; or (B) the taxpayer’s taxable income (reduced by net capital gain). 

Phase-Out Thresholds under 199A

The income phase-out thresholds for the deduction begin at $315,000 for joint filers and $157,000 for single filers. Thus, a married pass-through business owner who has taxable pass-through business income below $315,000, may deduct 20% of such pass-through income. If income exceeds $315,000 but falls below $415,000 ($207,500 for a single filer), the deduction begins to gradually phase-out.
 
However, once taxable pass-through income reaches $415,000 ($207,500 for a single filer), the deduction will depend on whether or not the business is a “specified service business.” A specified service business is defined as any business with income from services including but not limited to health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services and any other business where the principal asset is the reputation or skill of one or more employees.

For non-service businesses, once income reaches $415,000 ($207,500 for a single filer), the deduction is capped at the lesser of: 
  • 20% of qualified business income; or
  • The greater of: 
    • 50% of W-2 wages paid to employees; or
    • 25% of W-2 wages paid to employees plus 2.5% of the unadjusted basis of qualified property in the business.  
Unfortunately, the limitations are even more stringent when applied to specified service businesses. For a taxpayer who owns a specified service business, once the taxpayer’s taxable income reaches the threshold of $415,000 ($207,500 if not filing jointly), there is no deduction permitted at all. 

Contact Top Boca Raton Tax Attorneys Today

Please contact Morris Law Group with any questions regarding the newly enacted §199A, or any other tax planning needs to ensure your interests are protected.
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