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Understanding the 199A Deduction

Understanding the 199A Deduction
Ines Zemelman, EA
06 May 2019

This tax year has brought many changes, one of which is the new 199A deduction, or pass-though deduction. The purpose of this deduction is to provide some relief to small businesses by allowing the deduction of as much as 20% of income. This article will provide you with an overview of this deduction, and some watch-outs in claiming it.

An Overview

This deduction gives businesses with pass-through income - S corporations, sole proprietorships, some rentals, and non-publicly traded partnerships - the ability to deduct as much as 20% of qualified business income, or QBI. This provision of the new tax law is meant to provide some relief to small businesses who did not benefit from the cut to the corporate rate.

Calculating the Deduction

The deduction is the least of:

  • Twenty percent of ordinary taxable income less net capital gains, or
  • Twenty percent of qualified business income plus twenty percent of qualified REIT dividends and partnership income (publicly traded)

Limitations on the Deduction

As with many tax benefits, this deduction is limited above a certain income level. In the case of the 199A pass-through, the limits begin at $157,500 if single ($315,000 if married). These limits include the following factors:

  • UBIA - unadjusted basis immediately after acquisition - of any qualified property the business holds
  • W-2 wages the business has paid
  • The types of businesses that are allowed to take the deduction

The phase-out leads to ineligibility for the deduction (2018 tax year) at $217,500 for singles and $415,000 for married.

What is Qualified Business Income?

QBI is the net taxable income attributed to qualified businesses, although there are some exceptions. Dividend income, interest income, capital gains and losses are excluded, as is income from outside of the US.

Eligibility Limitations

There are a few businesses that do not qualify, including C corporations. Also, businesses exceeding the $207,500 / $415,000 limits cannot claim the deduction when the business is one of the following:

  • Law
  • Health
  • Performing arts
  • Actuarial science
  • Athletics
  • Consulting
  • Investing
  • Financial services
  • Trading
  • Investment management
  • Any business if the principal business asset is skill or reputation of one of the employees

As with most of United States tax law, this deduction can be complicated. It will, however, save many small businesses a significant amount of money. Consult with a tax professional to determine how you can benefit.

It is important to emphasize that those types of business are not limited in taking the full deduction as long as taxable income of the individual taking the deductions is below a taxable income threshold.

Ines Zemelman, EA
Founder of TFX