Breaking the Code: Section 199A
By: Antony T. Khalife, CPA, MST, CFP®
On August 8, 2018, the IRS issued proposed regulations under the new IRC Section 199A - more commonly referred to as the 20 percent pass-through deduction. Of the 184-page document, we wanted to highlight some of the major points.
Who does this deduction apply to?
Code. Sec. 199A provides up to a 20% deduction on net business income from Self-Employment, Rental Real Estate, Trusts/Estates, Partnerships, and S-Corporations. C-Corporations are not entitled to this new deduction. For example, you are self-employed and generate $100,000 of net qualified business income (after expenses) during calendar year 2018. You would be entitled to a Sec. 199A deduction of approximately 20%, or $20,000, subject to certain limitations.
What’s the catch?
The deduction is subject to some limitations based upon taxable income and also limited for certain industries and professionals, referred to as “Specified Service Trade or Business” (SSTB).
For single taxpayers, you may not benefit from the full deduction with taxable income above $157,500; for taxpayers filing a joint return, the taxable income threshold is $315,000. If you are not a SSTB but exceed the taxable income thresholds, there are a number of steps and factors involved to calculate your specific pass-through deduction. If you exceed these taxable income thresholds and are one of the SSTBs, then you will not be eligible to claim this deduction.
What is a Specified Service Trade or Business (SSTB)?
The following services and fields have been specifically identified for purposes of this Code Section:
accounting;
actuarial science;
athletics;
brokerage services;
consulting;
dealing in securities, partnership interests, or commodities; or
financial services;
health;
investing and investment management;
law;
performing arts;
trading;
any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners (for example, endorsing products or services; licensing or receiving income for an individual’s image or likeness; receiving appearance fees or income).
Taxpayers may rely on the “proposed” regulations pending the issuance of the final regulations. IRC Section 199A is one of the most significant provisions of The Tax Cuts and Jobs Act of 2017 (TCJA), which was signed into law on December 22, 2017. Though the deduction is not available for tax year 2017, it provides noteworthy planning opportunities for 2018 and beyond.
To ensure compliance with the requirements imposed on us by IRS Circular 230, we inform you that any tax advice contained in this communication (including any attachments) is not intended to and cannot be used for the purpose of: (i) avoiding tax-related penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any tax-related matter(s) addressed herein.