Business Owners Can Deduct the New Section 199A Business Income Deduction in 2018

Eligible business owners may now deduct up to 20 percent of certain business income from a business operated as a sole proprietorship, partnership, S corporation, trust, or estate.  The deduction may also be claimed on dividends from real estate investment trusts.  The new deduction is referred to as the Section 199A deduction and was created by the Tax Cuts and Jobs Act (TCJA).  Congress made this change to create tax parity between business owners and C Corporations.  The TCJA reduced the top federal corporate tax rate from 35 % to 21% but only reduced the top federal personal income tax rate from 39.6% to 37%. Excluding the 20% of qualified business income reduces the top personal rate from 37% to 29.6%.

Here are four basic things business owners should know about this complicated deduction:

1. There is an income threshold to qualify for the deduction so if your total taxable income

before taking the qualified business income deduction is less than $315,000 for a married couple filing a joint return, or $157,500 for all other filers you are eligible for Section 199A deduction regardless of what type of business you have.  In addition if your business does not fall into one of the service fields listed below you can take the full deduction regardless of your taxable income.

2. The deduction is available whether you itemize your deductions on Schedule A or take the standard deduction.  However, the deduction will not reduce your adjusted gross income or

reduce your earnings subject to Social Security or Medicare.  Keep in mind income earned

through a C corporation or by providing services as an employee is not eligible for the deduction.

3. For each qualified trade or business the Section 199A deduction is limited to the lesser of

these two amounts:
– Twenty percent of qualified business income; or
– Twenty percent of taxable income computed before the qualified business income

deduction minus net capital gains.

4. If your total taxable income before taking the qualified business income deduction exceeds $315,000 for a married couple filing a joint return, or $157,500 for all other filers, there are additional limitations if you in a specified service field.  If you are in a specified service field, once your income exceeds $415,000 for a married couple filing jointly and $207,500 for all other filers, your Section 199A deduction is totally phased out.  A specified service field includes health care, accounting, law, performing arts, consulting, financial services and any service business that relies on the reputation of one of the officers or employees. The good news is that if you do not fall into one of the specified service fields you can take the full deduction regardless of your income.

In closing, I would highly recommend you make the maximum contribution to your Simple IRA, solo 401(k) or SEP IRA to reduce your taxable income and increase your eligibility for the Section 199A deduction.  If you need assistance calculating the Section 199A deduction or preparing your taxes please call Gregory J. Spadea at 610-521-0604.