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The Tax Cut and Jobs Act of 2017 added Code Section 199A, which provides a deduction for 20% of qualified business income. This provision attracted much attention but raised many questions about the details.
On January 22, 2019, the IRS issued final regulations on this deduction, which largely follow the proposed regulations issued in August 2018. A quick summary is as follows-
1. The deduction applies to qualified business income passed-through by sole proprietorships, S Corporations, and partnerships to any entity other than a C Corporation. It also applies to qualified REIT dividends and qualified publicly traded partnership income. It does not apply to income earned as an employee, including reasonable compensation paid to an S Corporation shareholder, or to guaranteed payments to a partner.
2. The deduction is limited to 20% of taxable income before the Sec. 199A deduction in excess of net capital gains.
3. The deduction is from adjusted gross income, not to adjusted gross income, but applies regardless of whether or not a taxpayer itemizes. It will not affect income subject to self-employment tax or Indiana taxable income.
4. If the taxpayer’s taxable income before the Sec. 199A deduction is below a threshold ($315,000 for marrieds filing joint and $157,500 for all others), no other limitations apply. If the taxpayer’s taxable income is in a phase-out range ($315,000-$415,000 for joint filers and $157,500-$207,500 for others), partial limitations apply. For taxpayers above the phase-out range, the following limitations apply-
· Income from a specified service business is not eligible for the deduction. Specified services businesses include the fields of health, law, accounting, consulting, athletics, performing arts, and brokerage of financial products. They do not include real estate or insurance agents or brokers.
· The deduction is limited to the lesser of- 1) 50% of W-2 wages from the business, or 2) 25% of W-2 wages from the business, plus 2.5% of the unadjusted basis of qualified property in the business.
Please contact us if you would like more information about this complex area..