One
of the most complicated yet compelling provisions of the recently enacted tax
reform is the addition of §199A to the Internal Revenue Code. §199A provides a
deduction for business owners of pass-through entities (non-corporations).
Subject to the thresholds and exceptions described below, §199A permits such
pass-through business owners to deduct up to 20% of their qualified business
income.
The
income phase-out thresholds for the deduction begin at $315,000 for joint
filers and $157,000 for single filers. Thus, a married pass-through business
owner who has taxable pass-through business income below $315,000, may deduct
20% of such pass-through income. If income exceeds $315,000 but falls below
$415,000 (207,500 for a single filer), the deduction begins to gradually phase
out.
However,
once taxable pass-through income reaches $415,000 (207,500 for a single filer),
the deduction will depend on whether or not the business is a “specified
service business.” A specified service business is defined as any business with
income from services including but not limited to health, law, accounting,
actuarial science, performing arts, consulting, athletics, financial services,
brokerage services and any other business where the principal asset is the
reputation or skill of one or more employees.
Unfortunately,
the limitations are even more stringent when applied to specified service
businesses. For a taxpayer who owns a specified service business, once the
taxpayer’s taxable income reaches the threshold of $415,000 ($207,500 if not
filing jointly), there is no deduction permitted at all.
Please do not hesitate
to contact Morris Law Group should you have any questions
regarding the newly enacted §199A and the creative planning techniques
available to properly prepare and adhere to it.
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