C-corp business tax rates had a huge drop with the new tax laws (from a 35%
top rate at $50,000 in profits down to a flat 21% rate).
BUT… If you operate your business as a pass-through entity, such as a proprietorship, partnership, or S corporation, the profits of that business can generate the Section 199A tax deduction for 2019 (and maybe for 2018?).
There are 2 types of business in the eyes of the IRS (regarding this tax rule). There are “no-problem” businesses and “out-of-favor” businesses (those depending upon the reputation/skill of the owner – typically service businesses (doctors, lawyers, engineers, investment advisors, pro-athletes, celebrities, etc.). Unfortunately, mine own is an “out-of-favor” business! Interestingly, REALTORS are not “out-of-favor” service businesses.
There are the “No-Problem Businesses”
You qualify for the Section 199A deduction—period, regardless of pass-through business type—when you have
- pass-through Qualified Business Income (QBI), and
- 2019 Form 1040 taxable income equal to or less than $160,700 single (and
head of household) or $321,400 married, filing jointly.
With Form 1040 taxable income equal to or less than the thresholds listed above, any type of business including doctors, lawyers, accountants, financial planners, stockbrokers, manufacturers, retailers, consultants, and all other businesses with pass-through income qualify for the deduction.
There are no out-of-favor specified service business problem with income below the above thresholds. And the tax deduction calculation is easy.
With taxable income (Adjusted Gross Income (AGI) minus your standard or itemized deductions) 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 tax deduction is $64,000. That’s a very big deal!
However, if your taxable income is above the thresholds with a “no-problem” business (like a REALTOR), you need to consider tax planning – now. Why now? Because some strategies require that you have time on your side.
With high-income and NO PLANNING, you’ll lose out.
“Out-of-Favor” Businesses
The tax calculations are much more complicated – with more hoops to jump through with income above the aforementioned figures. Yes, for these “over the threshold” businesses, tax planning is more critical to take the largest deduction.
In either type of business (over the thresholds) you should consider a tax plan strategy to take full advantage of the new laws. You’ll want time to consider your options and get that tax-savings plan in place well before year’s end.
I can help. Let’s get to work!
all the best… Mark
PS – If you own a successful small business or are a high-earning self-employed person, make sure you read the information on the “PROACTIVE Tax Planning” page that can be found among the tabs above this and every post.