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Spousal Business and 199A Deduction

Say both you and your spouse have your own pass-through businesses. Your spouse’s business provides paid services to your business. Could this arrangement cause you problems when claiming a Section 199A deduction?

Let’s look at an example: Say your business is an out-of-favor specified service trade or business (SSTB) and your 2018 joint taxable income is over $415,000. None of your qualified business income (QBI) is eligible for the deduction.

Your spouse’s business is advertising, an in-favor business for the 199A deduction. But 5 percent of her gross revenue comes from advertising services she renders to your business.

Because (a) your business is out of favor, and (b) your joint taxable income is more than $415,000, your wife’s business must treat 5 percent of her QBI as being from an out-of-favor SSTB (meaning no 199A deduction on the 5 percent).

If your spouse owns a business or rental property and he or she does business or rents property to your sole proprietorship, partnership, or S corporation—beware.

Some or all of your spouse’s business or rental income might be out-of-favor SSTB income if your business is an out-of-favor SSTB. Because you are married, the attribution rules give you 100 percent of your spouse’s ownership, and vice versa.

Of course, in 2018, the SSTB issue affects you only if your taxable income is over

  • $315,000 on a joint return, or
  • $157,500 for all other filing statuses.

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