If you operate your business as a pass-through entity, such as a proprietorship, a partnership, or an S corporation, the profits of that business can generate the Section 199A tax deduction.
You qualify for the Section 199A deduction—period, regardless of pass-through business type—when you have
- pass-through qualified business income (QBI), and
- 2020 Form 1040 taxable income equal to or less than $163,300 (single and head of household) or $326,600 (married, filing jointly).
With Form 1040 taxable income equal to or less than the thresholds above, doctors, lawyers, accountants, financial planners, stockbrokers, manufacturers, retailers, consultants, and all other businesses with pass-through income qualify for the deduction.
With income below the thresholds, there’s no problem for an out-of-favor specified service business.
And the calculation is easy.
With taxable income equal to or less than the thresholds, you qualify for the Section 199A deduction. Your deduction will equal the lesser of
- 20 percent of your Form 1040 taxable income less net capital gains and dividends, or
- 20 percent of your QBI.
Note that qualification for the deduction starts with your Form 1040 taxable income.
Example. You are married with joint taxable income of $320,000 and QBI of $350,000. Your Section 199A deduction is $64,000.
As you can see, no issues.
Once your taxable income is above the thresholds, you need to consider tax planning—now. Why now? Because some strategies require that you have time on your side.
For example, if you switch from a proprietorship to an S corporation to benefit from the W-2 wage strategy, your switch does not begin until you have the S corporation in place.
If you are looking at a retirement plan strategy, you want time to consider your options and get that tax-saving plan in place.
If your taxable income is going to exceed the thresholds, we should spend some time examining your situation and, if needed, looking at tax-planning opportunities.
Source: Bradford Tax Institute