2019 Edition – Answers to your Tax Reform Questions
For most small businesses and the self-employed, the 20 percent tax deduction from new tax code Section 199A is the most valuable deduction to come out of the Tax Cuts and Jobs Act.
The Section 199A tax deduction is complicated, and many questions remain unanswered even after the IRS issued its proposed regulations on the provision. And to further complicate matters, there’s also a lot of misinformation out there about Section 199A.
Below are answers to five common questions about this new 199A tax deduction
Answers to the Tax Reform Questions we've been asked
Below are answers to five common questions about this new 199A tax deduction.
Real Estate Agent Professional questions
Question 1: Are real estate agents and brokers in an out-of-favor specified service trade or business for purposes of Section 199A?
Answer: No. Real Estate Agents and Brokers are listed among the group of professionals that are entitled to take a deduction of up to 20 percent of qualified business income (QBI). Here's a link to the IRS ruling that describes implications. IRS Regulations on Qualified Business Income Deduction
S-Corporation tax reform questions
Question 2: Do my S corporation shareholder wages count as wages paid by the S corporation for purposes of the 50 percent Section 199A wage limitation?
Answer: Yes. Shareholders in a S Corporation will able to take the 199A deduction of qualified business income (QBI) using the following formula. To calculate the 199A deduction an S Corp shareholder can take the lessor of 20% of QBI OR the greater of 50% of W-2 wages or 25% of W-2 wages plus 2.5% of the unadjusted basis after acquisition of qualified property.
Tax laws are an ever changing world and often complicated. Contact us for more clarity.
Self Employed Retirement tax reform questions
Question 3: Will my allowable SEP/SIMPLE/401(k) contribution as a Schedule C taxpayer be based only on Schedule C net earnings, or do I first subtract the Section 199A deduction?
Answer: You’ll continue to use Schedule C net earnings with no adjustment for Section 199A.
The impact of depreciation and the 20% deduction
Question 4: Is my qualified business income for the Section 199A deduction reduced by either bonus depreciation or Section 179 expensing?
Answer: Yes, to both bonus depreciation and claiming the Section 179 expense deduction will reduce your qualified business income in determining the 199A deduction.
You're categorized as a excluded professional by the IRS, but can you still get the deduction?
Question 5: The out-of-favor specified service trade or business does not qualify for the Section 199A deduction, correct?
Looking at your taxable income is the first step to see whether you qualify for the Section 199A tax deduction. If your taxable income on IRS Form 1040 is $157,500 or less (single) or $315,000 or less (married, filing jointly) and you have a pass-through business such as a proprietorship, partnership, or S corporation, you qualify for the Section 199A deduction.
With taxable income equal to or below the thresholds above, your type of pass-through business makes no difference. Retail store owners and medical doctors with income equal to or below the thresholds qualify in the same exact manner.
If you have any questions that weren't covered above contact us.
Rema Washington, CPA