Perfect Capital

FAQs

Do I need to have an LLC to get the Section 199A deduction?

No. You don’t need to. You will be happy to know that it is available to sole proprietors, rental property owners (according to our Information and the new regulations proposed by the state), S corporation Shareholders and partnerships (multi-member LLCs, LLPs, and all the other similar variants). Creating an LLC is a good idea for many reasons, but you don’t need it for the Section 199A deduction.

The Section 199A deduction is a business deduction or not?

No. It is not a business deduction. It is taken on the tax return of the owner’s page 2 Form 1040 on the line 9.You don’t need to look at your 2017 tax returns for line 9… the IRS has to fragment Form 1040 into multiple pieces and re-label them for the desire of everyone to get a postcard tax return. No one is complaining about the state tax returns, which are easily exceeding three pages (in California).

Coming back to the IRS and Form 1040 being fragmented…Taking an example of Schedule 1, titled Additional Income and Adjustments to Income-vital page 1 of old Form 1040.

The Section 199A deduction is available to rental property owners or not?

Yes, it is available, but there are rules listed under IRS Notice 2019-7 that include safe harbor requirements.

Why the Section 199A deduction is made available on the owner’s tax return?

The answer is simple. Section 199A is written in such a way that there are restrictions based on household income, so it would be hard for the business entity tax return to look into the individual tax situation of each owner.

What are the specific professions (specified service trade or business) getting limited deductions?

According to Section 199A, certain professions get limited deduction after reaching a certain threshold level of income. This list includes

  • accounting,
  • actuarial science,
  • athletics,
  • brokerage services,
  • consulting,
  • financial services,
  • health,
  • investing services,
  • law,
  • performing arts, and
  • Securities trading services.

Any trade or business where the principal source of income of such trade or business depends on the reputation or skill of one or more of its workforce or owners.

I am a CRNA operating an S Corp. Can you tell me if I come under specified professions getting limited deductions?

Yes, as per the Proposed Regulations 1.199A, the expanded definitions of SSTBs, specifically for health, the regulatory state that anyone offering medical services come under a specified service trade or business. This includes

  • nurses,
  • nurse anesthetists,
  • chiropractors,
  • physical therapists,
  • Massage therapists, etc.
Law professionals like
  • Attorneys,
  • paralegals,
  • mediators, and
  • Judges are also included.
Accounting professionals, including
  • CPAs,
  • Enrolled Agents,
  • bookkeepers,
  • tax professionals,
  • Financial auditors, etc. are included.

Legal documents or papers do not intervene in this definition.

A realtor operating an S Corp will be considered an SSTB or not?

No, as per the Proposed Regulations 1.199A has specifically mentioned that real estate agents will not be considered or come under specified service trade or business. Yes, you guessed it right! Politically, the window must be perfect.

If my business comes under an SSTB, will I lose my Section 199A deduction?

This is one of the confusing questions asked by most of our clients. Maybe Yes or Maybe not! If you are married and in the doctor, making a profession of $300,000 as a household income, you may lose your Section 199A deduction, but if your income is $500,000, you may lose your income. It would be best if you re-read this. If your business is labeled under specified service trade or business, that doesn’t mean that your business is terrible until you meet thresholds level, which is $157,500 for singles and $315,000 for a married couple filing tax jointly. These numbers indicate the wrap up of the 24% marginal tax bracket, and the next tax bracket starts from 32%. This means 32%, 35%, and 37% are wealthy taxpayers and get limited Section 199A deduction.

What will happen when I file married filing separately? Can I get the SSTB limitations?

This may be a good try, but we must mention here that the IRS is smart enough. Congress is smart. The Joint Committee on Taxation is smart. It is not a Joke; they are smart! And they might have kept a check on you a mile away… probably they heard you too. Keeping all jokes aside. The tax code is very particular about tax filing and can prevent pure tax arbitrage based on tax filing status. If you are married and filing your taxes separately, your $315,000 becomes $157,500… if you are talking about a community property state, then that thing may not make a difference because the K-1 will be the tax document coded with the specified service trade or business designation. That will split your income 50-50 (California) will not help you.

What is the Qualified Business Income (QBI) Deduction?

According to Section 199A of the Internal Revenue Code, many taxpayers are eligible for a qualified business income deduction from a skilled trade or business that is operated directly or indirectly via a pass-through entity. This type of deduction has two segments:

The eligible taxpayers may be entitled to a deduction of up to 20 percent of qualified business income (QBI) from a business operated domestically as a sole proprietorship or through a partnership, S corporation, trust, or estate. Individuals paying taxes with taxable income exceeding $315,000 for a married couple who file an income tax jointly, or $157,500 for all other taxpayers, the deduction is limited and subject to cases like the type of trade or business, the taxable income of the taxpayer, the W-2 wages paid by the qualified trade or business and the UBIA or unadjusted basis immediately after acquisition of eligible property owned by the trade or business. Income earned through a C corporation or by providing services as an employee will not be able to get the deduction.

Eligible taxpayers may also be entitled to a deduction of up to 20 percent of their combined qualified REIT, real estate investment trust dividends, and qualified PTP that is publicly traded partnership income. This segment of the QBI deduction of the section 199A deduction is not restricted to W-2 wages or the eligible UBIA property.

The sum of these two segments is called the combined qualified business income amount.

This amount is generally lesser of the combined eligible business income amount and 20 percent of the taxable income subtracting the taxpayer’s net capital gain. To check the deduction figures, go to Q&A 6 and 7. This deduction is viable for taxable years starting Dec. 31, 2017. Most eligible taxpayers claimed it for the first time when they filed their federal income tax of 2018 in 2019. This deduction is possible, provided an individual can itemize his or her deduction on Schedule A or go with the standard deduction.

How do S corporations and partnerships manage the deduction?

Generally, S corporations and partnerships do not pay taxes and are not eligible to deduce themselves. But all S corporations and companies have to give reports of QBI share of each shareholder or partner, W-2 wages, UBIA of qualified property, qualified REIT dividends, and qualified PTP income on Schedule K-1 so that shareholders or partners can calculate their deduction.

In 2018, I will file for income tax with taxable income under $315,000 jointly. Do I still need to calculate if I am come under SSTB to become eligible for the deduction? Is there any restriction on my deduction?

No, if your 2018 taxable income is less than $315,000 and you are filing your taxes jointly, you are eligible for deduction irrespective of your business type. You will qualify for deduction lesser of:

20% of your Qualified Business Income and 20 % of your qualified REIT dividends and qualified PTP income, or20% of your taxable income subtracting net capital gains.

In 2018, I will file taxes with taxable income between $157,500 and $207,500 single if I receive Qualified Business Income. Does it matter if this income is from an SSTB or not?

Yes, it does matter. Your taxable income is more than the threshold amount; your section 199A deduction following the SSTB will be limited. Since you are in the phase-in range, you will be allowed for some section 199A deduction following an SSTB. Additionally, your taxable income above the threshold amount, the section 199A deduction in comparison to your trade or business, including an SSTB, may be constrained to an amount of W-2 wages paid by the trade or business and the UBIA of qualified property owned by the trade or business. The phase-in range is $315,000 to $415,000 for joint filers and $157,500 to $207,500 for other statuses. You can get more information in this context from Section 1.199A-1 of the proposed regulation.

Can you tell me how S corporations and Partnerships handle these deductions?

Generally, S corporations and partnerships are not considered as taxpayers, and they can’t do the deduction themselves. But, S corporations and partnerships need to report QBI QBI, W-2 wages, UBIA of qualified property, qualified REIT dividends, and qualified PTP income on Schedule K-1 of each shareholder or owner so that each shareholder or partner can calculate deductions.

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