December 10, 2018

What is Section 199a (Qualified Business Income Deduction)?

The 20% Qualified Business Income Deduction (QBI Deduction) is one of the many changes taxpayers will spot on their tax returns come April 15^th. It was written into the tax code under IRS Code Section 199A was introduced as part of the changes implemented under Tax Cuts and Jobs Act at the end of 2017. This tax law allows business owners to take a deduction that can reduce their business income by up to 20%, a benefit that many will want to take advantage of. Qualifying for the deduction can be tricky, though, so it is important to understand the fundamentals before writing it into your tax plan for 2019.

The Basics

The QBI Deduction is available to individual taxpayers who own a small business that is classified as pass-through entities. This classification includes sole proprietorships, S corporations, partnerships, and, in some cases, trusts and estates. The new law became effective for tax years that begin on or after January 1, 2018. For most taxpayers, this means that they can claim their first QBI deduction when they file their 2018 tax returns on April 15^th, 2019.

Deduction Details

The deduction is calculated to be 20% of the taxpayer’s Qualified Business Income (QBI) from eligible pass-through entities. QBI for any one business is, in essence, its net income without considering investment activity. Recently, the IRS released a set of proposed regulations that provided a more thorough definition of QBI. Read our recent release to learn more.

The deduction is a below-the-line deduction, meaning it will not reduce a taxpayer’s Adjusted Gross Income. It is, however, available to taxpayers whether or not they itemize their deductions. In effect, the QBI Deduction will reduce an individual’s taxable income, reducing their tax base and therefore their tax bill.

QBI Limitations

Only certain taxpayers will be eligible to take the full 20% deduction. Many will have to consider one or more of the following limitations.

• Taxable Income Limitation – The deduction is limited to 20% of the taxpayer’s net income, without considering capital gains.

• Specified Service Business Limitation – Individuals who provide certain services, including those in the fields of law, health, accounting, and financial services, may find their deduction reduced or erased completely if their income is too high. When taxable income before the QBI deduction exceeds $315,000, a married taxpayer’s deduction will begin to phase out. When it reaches $415,000, it will disappear completely. The lower and upper thresholds for non-married taxpayers are $157,500 and $207,500, respectively.

• Business Wages or Property Limitation –Even individuals who are not in a specified service trade or business may find themselves facing a limitation. The limitation is as follows:

This limitation will only be a concern to taxpayers whose taxable incomes exceed the lower thresholds mentioned above ($315,000 for married taxpayers, and $157,500 for non-married taxpayers). At that point, the limitation will begin to phase in, and will fully apply when their incomes exceed the upper thresholds mentioned above ($415,000 for married taxpayers, and $207,500 for non-married taxpayers).

Contact Us

The QBI Deduction is a complex component of the new tax law but one that can result in compelling tax savings for qualifying business owners. The proposed regulations have not been finalized but provide insight into how the IRS will interpret and administer Section 199a. If you have questions about the Qualified Business Income deduction, 2018 tax planning or need assistance with another issue, Wilson Lewis can help. For additional information please call us at 770-476-1004 or click here to contact us. We look forward to speaking with you soon.