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Posted by Jim McClaflin, EA, NTPI Fellow, CTRC

Understanding Section 199A

Understanding Section 199A


As a new start-up entrepreneur, deductions can be accommodated. However, deductions are not rigid, they tend to undergo metamorphosis, and a deduction does not even remain forever. And sometimes, in some cases like that of the section 199A deductions, there is often an addition of new deductions.


What is Section 199A?

This is a form of qualified business deduction (QBI). One of the significant tax reforms that made way for the section 199A deduction was the Tax Cuts, and Jobs Act legalized in December 2017. 

With the 199A deduction, certain businesses can subtract chaos to twenty percent of their qualified business deduction (QBI), together with twenty percent of their real estate investment trust income(REIT) and their publicly traded partnership(PTP) income. The subtraction is strictly 20% of their taxable income.

However, not everyone can partake from this deduction. There are some business and income limitations attached to this. For example, you will be obligated to file a single return or joint return of $157,500 and $315,000 respectively in taxable income for that tax year.

All business should be domestic; this means that it’s limited to a company located in the US. Also, companies have to be a partnership, sole proprietorship, trust, S corporation to be eligible.


Important Information about Section 199A

Here is some essential info you need to understand about section 199A, though it is not limited to this information.

20% deduction: 

The section 199A deduction is equal to 20% of the income of eligible businesses, and adjustments may need to be made to the total. For example, if you run a business with $2 million of acceptable business income, your deduction could be $400,000


There are limits to taxable income

Section 199A cannot go over the 20% taxable income limit.


The section 199A is limited to domestic business incomes

This reduction system only covers businesses operating in the US. Businesses that are not in America cannot partake in reducing taxable income because America cannot tax foreign businesses.


Service businesses are likely to be exempted

Professional services like investment professionals, athletes, and others may not partake from such deductions. The focus here is the amount of taxable income generated. For example, if an unmarried taxpayer accesses over $206,500 or a wedded payer gets about $415,500 in taxable income, such people cannot get deductions at all. 


However, it is best to contact a financial advisor to get more details.

The QBI losses can be carried over.

The QBI makes up your total earnings when you have multiple businesses. This means that a dip in one industry can affect other companies, making it possible to experience a negative QBI. You will now carry the losses into the following year.

Here is an instance:  if you run an enterprise and your QBI was $45,000 and a different enterprise where a business had a $55,000 loss; therefore, your complete QBI will need to defeat the $10,000 loss to lead to a good outcome.

Subsequently, it can trigger a dip in your deduction for the current tax year and the following year.


Conclusion

Section 199A is a bit complicated as it is tax-related and has lots of information you always need to be in tune with. However, you can always ease your stress by getting tax professionals to help you with the mental work. It is suitable for legal and qualified small businesses, as it reduces your taxable income and eases financial stress.

If you always want to be at the forefront of your tax payments and you don’t want to work with a tax professional, ensure you get advice from a financial advisor once in a while to keep you in check as they are experts in this field.


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Jim McClaflin, EA, NTPI Fellow, CTRC
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