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.