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New Section 199A Deduction Could Provide Additional Business Tax Savings

The Tax Cut and Jobs Act of 2017, Provision 11011, Section 199A, has provided a 20% tax deduction for pass-through businesses. Eligible tax payers include sole proprietors, S-Corporations, Partnerships, Publicly Traded Partnerships (PTP), and Real Estate Investment Trust (REIT). Though computing the deduction could be a difficult challenge at best, many tax payers could end up adding to their bottom line.

Section 199 A, also referred to as the deduction for qualified business income, has two main components as follows:

  1. Eligible taxpayers may be entitled to a deduction of up to 20 percent of qualified business income (QBI) from a domestic business operated as a sole proprietorship or through a partnership, S corporation, trust or estate. For taxpayers with taxable income that exceeds $315,000 for a married couple filing a joint return, or $157,500 for all other taxpayers, the deduction is subject to limitations such as the type of trade or business, the taxpayer’s taxable income, the amount of W-2 wages paid by the qualified trade or business and the unadjusted basis immediately after acquisition (UBIA) of qualified property held by the trade or business. Income earned through a C corporation or by providing services as an employee is not eligible for the deduction (www.irs.gov).

  2. Eligible taxpayers may also be entitled to a deduction of up to 20 percent of their combined qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income. This component of the section 199A deduction is not limited by W-2 wages or the UBIA of qualified property ( www.irs.gov ).

At this point, you may be wondering how does an S-Corporation, Partnership, PTP, or REIT, qualify as a taxpayer when these business structures are considered “stand-alone” entities? Well, the answer to that question is that all of the aforementioned business structures report each partner’s or shareholder’s portion of Qualified Business Income (QBI), W-2 wages, Unadjusted Basis Immediately after Acquisition of Qualified Property (UBIA), qualified REIT dividends, and qualified PTP income on schedule K-1. The deduction is then determined for applicable tax payers.

A qualified trades or business as defined by the IRS, is any trade or business except specified service trade or business involving the performance of services in accounting, health, law, actuarial science, performing arts, consulting, athletics, financial services, investing, investment management, trading, or any trade or business that where the principal asset is the reputation or skill(s) of one or more of its employee(s). The exception only applies is the tax payer’s taxable income exceeds $315,000 for a married couple filing a joint return, or $157,000.00 for all others. This exception also applies to tax payers who perform services as an employee ( www.irs.gov ).

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