199A

Section 199A Pass-Through Deduction

The Section 199A deduction for pass-through entities was signed into law as part of the Tax Cuts and Jobs Act 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.

Overview

Section 199A allows for an up to 20% deduction from pass-through income for a domestic business that operates as either a:

  • Sole proprietorship
  • Partnership
  • 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.

How it Works

In its simplest form, the deduction is calculated off a specific income threshold for the taxpayer(s). 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 simply by the lesser of:

  • 20% of qualified business income (QBI) or
  • 20% of the overall taxable income of the individual

Deduction Limitation

Taxpayers with taxable income below the threshold are not subject to limitations on the deduction and are not prevented from claiming the deduction on SSTB income.

If a taxpayer’s income exceeds the $315,000 ($157,500 for single filers) threshold, then certain limitations apply. If this occurs, the deduction will be limited to the lesser of:

  • 20% of the taxpayer’s qualified business income (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 basis of all qualified property

Excluded Businesses

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:

  • Health
  • Law
  • Accounting
  • Actuarial Science
  • Performing Arts
  • Consulting
  • Athletics
  • Financial Services
  • Brokerage Services
  • Investing and Investment Management
  • Trading
  • 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

To Learn More

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.

For more information on the Section 199A pass-through deduction, please click here to download our whitepaper.

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