The 2017 Tax Cuts and Jobs Act introduced major changes to the tax code and sweeping changes through Section 199A of the Internal Revenue Code. The bottom line: individuals, estates, and trusts may now deduct up to 20% of their qualified business income (QBI) from sole proprietorships and pass-through entities. But the IRS released even more updates in August.
These more recent changes to the tax code are potentially huge news for many taxpayers, says taxation expert Arthur J. Werner. Of course, as a tax pro, you must be ready to cut through cloudy layers of ambiguity and uncertainty for your clients. That’s exactly what Werner helps you do in his Eli Financial webinar, “Section 199A Deduction – How to Maximize Benefits?” Werner will arm you with the latest guidance on eligibility, income thresholds, W2 wages, and investment limits.
Section 199A Benefit: 20% Tax Savings
Section 199A is the “best small business and individual investor tax break of the 21st century,” according to Stephen Nelson, author of Quickbooks for Dummies and Quicken for Dummies. “Using Section 199A, business owners and real estate developers may simply ‘not’ pay income taxes on the last 20% of the income they earn!” he told the Mad Fientist.
Here is what Section 199A allows: Pass-through business entities such as sole proprietorships, partners in proprietorships, some real estate investors, and S corporation shareholders can deduct up to 20% of their income.
There are a few caveats to be aware of:
- QBI does not include capital gains, interest income, or dividend income
- QBI does not include income outside of the U.S.
- QBI also does not include S corp shareholder-employee wages, guaranteed payments made to partners of a partnership, or other amounts a partnership may pay to a partner for services.
Be Wary of Income Limits
Those seeking the deduction should also keep income limits in mind, KB Financial Advisors notes. They top out at $157,500 for a single taxpayer or $315,000 for those who are married and filing jointly.
“If your taxable income exceeds this amount, however, you will be subject to restrictions or limitations on this particular tax break,” says KB Financial Advisors. “That means you need to do some careful tax planning to make the most of what the IRS will give you.”
Opportunity: One possible work-around is to operate as an independent contractor, though the IRS will disallow the QBI deduction if you switch from employee to contractor while still doing essentially the same job.
Heed ‘Special Service Trade or Business’ Exemptions
Plenty of details are still being hashed out on this deduction. On August 8, 2018, the IRS issued new regulations related to Section 199A that may prove super beneficial to some taxpayers.
What’s changed: Now, explain partners and associates at K&L Gates, self-employed persons and small businesses can take the QBI deduction as long as they don’t operate in certain specified trades or businesses. Those prohibited trades include:
- Health
- Law
- Accounting
- Actuarial services
- Performing arts
- Consulting
- Athletics
- Financial services
Note: Engineers and architects are exempt from the restriction.
Generally, these “special service trade or business” (SSTB) occupations hinged on whether a taxpayer received income based on their “reputation or skill”—a potentially massive catch-all. But, as K&L Gates notes, the August update whittles that criteria down to:
- Endorsement income for products and services
- Income from licensing an individual’s image or likeness
- Appearance fees or income
Can a taxpayer separate an SSTB, such as law or consulting work, from a component business that would otherwise qualify for the Section 199A deduction? To answer this, the IRS created a de minimis exception that applies to trades or businesses with receipts of $25 million or less if less than 10 percent of gross receipts are attributable to an SSTB, or gross receipts exceeding $25 million if less than 5 percent are attributable to an SSTB.
Yes, this is a potentially exciting deduction, Werner affirms. But securing it won’t be easy. In his webinar “Section 199A Deduction – How to Maximize Benefits?” Werner provides the guidance you need to help clients take advantage of this potentially huge benefit.
