The Tax Cuts and Jobs Act included a deduction for pass-through business to level the playing field with corporations who received a significant tax break. If you are self-employed, an independent contractor, or own a business other than a C corporation, this new deduction could boost your tax refund.
The final regulations for Section 199A were issued in January of 2019 and provide the details for how the deduction will be implemented.
The 20% Deduction
The Section 199A deduction provides a 20% deduction of qualified business income or income from Real Estate Investment Trust (REIT) dividends or qualified publicly traded partnership income. If you have both business income and REIT or partnership income, there is an overall limitation on the deduction.
Qualified business income includes the net amount of any items of income, gain, deduction, and loss, but does not include any short-term or long-term capital gains, dividends, or interest. It also won’t include any reasonable compensation paid to the taxpayer by their own business, as is done in some S corporations. Some types of trades or business are also specifically excluded from taking the deduction if the taxpayer’s income exceeds a certain amount, so consult with a tax preparer before claiming the deduction.
Taxpayers with qualified business income of under $160,700 can take the deduction of 20% of their income. However, if your income is greater than this number, there may be some limitations on the deduction.
The deduction phases out between income levels of $160,700 and $210,700 for taxpayers who engage in a specified trade or business. The phase-out levels are between $321,450 and $421,450 for married taxpayers who file jointly.
Some of the specified trades or business that are subject to the limitation include service businesses in the health, legal, accounting, consulting, or financial services fields. Once your income exceeds the maximum allowable amount, you can’t receive the Section 199A for that tax year.
Many self-employed taxpayers will receive a nice tax break from the new Section 199A deduction. However, taxpayers with higher incomes and/or who engage in specified trades or businesses may see increased complexity on their tax returns and should consult a tax preparer.
The Gartzman Law Firm offers tax return preparation and tax settlement help. Use our contact form to request a consultation with an Atlanta tax resolution attorney.