Five Things You’ll Want to Know About the 199A Deduction in 2020

The Tax Cuts and Jobs Act (TCJA) included a provision to help small business owners reduce their tax liability. The new deduction, commonly called the Section 199A deduction, allows some small business owners to deduct up to 20 percent of their qualified business income from their taxable income. In other words, small business owners have the potential for saving thousands of dollars in taxes by lowering their taxable income through a Section 199A deduction.

However, some terms of Section 199A can be tricky. The IRS did not immediately release information about the rules and requirements for claiming a Section 199A deduction. You are not alone if you continue to have questions about the Section 199A deduction. Our Maryland tax attorney answers five of the top questions about the Section 199A deduction in this article. If you have additional questions, we encourage you to contact our office for answers.

Five Questions About the Small Business Tax Deduction

1. What Is The Definition Of “Qualified Business Income?”

Under Section 199A, the deduction applies to “qualified business income.” Therefore, defining what the IRS considers qualified business income becomes a crucial step in calculating your tax deduction. According to the IRS, qualified business income is “domestic income from a trade or business.” Therefore, foreign income is excluded from the tax deduction. Other income exclusions from the Section 199A deduction include interest, employee wages, dividends, and capital gain.

2.  Are All Small Business Owners Eligible For The Section 199A Deduction?

Many small businesses are formed as pass-through entities. A pass-through entity does not pay taxes on business income. The company “passes” income through the company to the owner, who then pays personal income taxes based on the net business income. In most cases, sole proprietors, LLC shareholders, S corporation shareholders, and partners may be eligible for a Section 199A deduction. Some real estate investors might also qualify for the small business tax deduction if they meet strict guidelines.

3.  Are There Income Qualifications For The Small Business Tax Deduction?

Yes, the Section 199A deduction phases out for higher-income taxpayers. The small business deduction phases out once taxpayers have taxable income of $157,500 for individual filers and $315,000 for married filing jointly filers. The Section 199A deduction phases out completely after an individual filer has $207,500 or more in taxable income and after joint filers have $415,000 or more in taxable income.

4.  How Much Is My Small Business Deduction?

If a taxpayer’s taxable income is below the income threshold of $157,500 for single filers and $315,000 for joint filers, Section 199A allows the taxpayer to deduct the lesser of:

·       20 percent of Qualified Business Income plus 20 percent of qualified REIT (real estate investment trust) dividends and qualified PTP (publicly traded partnership) income; OR,

·       20 percent of taxable income less any net capital gain.

Income thresholds may change to reflect inflation. Each year, it will be necessary for taxpayers to verify the current year’s income thresholds for a Section 199A deduction.

5.  Can I Still Take The Pass-Through Entities Deduction If I Am Considered A Specified Service Trade Or Business (SSTB)?

If your taxable income is below the current income threshold amounts, the SSTB exception does not apply. However, the deduction is phased out for taxpayers whose taxable income exceeds the income threshold levels.

An SSTB is a business in which the principal asset for the business is the skill or reputation of one or more owners or employees. Examples of an SSTB include businesses providing services in the fields of accounting, financial services, law, investment management, health, consulting, performing arts, athletics, and actuarial science. SSTBs also include businesses or trades that receive income from endorsing services or products, uses a person’s voice, image, or likeness, or appears on television, events, radio, or other media formats.

Determining whether a business is an SSTB is crucial to decide whether the owner is eligible for any portion of the small business tax deduction under Section 199A.

Contact a Maryland Tax Attorney for Help

Other considerations might need to be addressed to determine if your business qualifies for the Section 199A deduction. If you have questions, please call our office for help. Seek advice and gain clarification before you complete and file your tax return instead of discovering you owe additional taxes, penalties, and interest because of an honest mistake.

Tax deductions for small business owners can be confusing. Taking advantage of all tax deductions available allows a small business owner to reduce his or her tax liability. If you have tax questions related to your small business, contact Thienel Law today. Maryland tax attorney Steve Thienel is dedicated to assisting clients in Maryland, Virginia, and throughout the DC Metro area.

Learn how the current tax laws can help you reduce your tax liability to keep more money in your pocket.