The enactment of the Tax Cuts and Jobs Act late last year brought about a new provision of the Internal Revenue Code. Sec. 199A allows owners of sole proprietorships, S corporations, or partnerships to deduct up to 20 percent of the income earned by the business. Here are some of the highlights of Sec. 199A.
- Sec. 199A allows taxpayers other than C corporations a deduction of 20 percent of qualified business income earned in a qualified trade or business, subject to certain limitations.
- The deduction is limited to the greater of either (1) 50 percent of the W-2 wages with respect to the trade or business, or (2) the sum of 25 percent of the W-2 wages, plus 2.5 percent of the unadjusted basis immediately after acquisition of all qualified property (tangible property subject to depreciation under Sec. 167). The deduction also may not exceed (1) taxable income for the year over (2) net capital gain plus aggregate qualified cooperative dividends.
- Qualified trades and businesses include all except those performing services as an employee and "specified service" trades or businesses: those include the performance of services in law, accounting, financial services, and several other enumerated fields, or where the business's principal asset is the reputation or skill of one or more owners or employees.
- Qualified business income is the net of qualified items of income, gain, deduction, and loss with respect to a qualified trade or business that are connected with the conduct of a business in the United States. However, some income, including certain investment-related income, reasonable compensation paid to the taxpayer for services to the trade or business, and guaranteed payments, are excluded from qualified business income.
- The W-2 wage limitation does not apply to taxpayers with taxable income of less than $157,500 for the year ($315,000 for married filing jointly). It is phased in for taxpayers with taxable income above those amounts. Income from specified service businesses is not excluded from qualified business income for taxpayers with taxable income under those threshold amounts.
- The new law also reduces the threshold at which an understatement of tax is substantial for purposes of the accuracy-related penalty under Sec. 6662 for any return claiming the deduction, from the applicable lesser of 10 percent of tax required to be shown on the return or $5,000 before the new law, to 5 percent of tax required to be shown on the return or $5,000.
Be sure to speak with your tax professional for advice specific to your business to make sure you're taking full advantage of these changes to the tax code.