For most small businesses and the self-employed, the 20 percent tax deduction from new tax code Section 199A is the most valuable tax deduction to come out of the Tax Cuts and Jobs Act tax reform.
The Section 199A tax deduction is complicated, and many questions remain unanswered even after the IRS issued its proposed regulations on the provision. And to further complicate matters, there’s also a lot of misinformation out there about Section 199A.
In this post, I’m going to give you answers to six common questions I’ve received during the past several months.
Question 1. Are real estate agents and brokers in an out-of-favor specified service trade or business for purposes of Section 199A?
Answer 1. No.
Question 2. Do my S corporation shareholder wages count as wages paid by the S corporation for purposes of the 50 percent Section 199A wage limitation?
Answer 2. Yes.
Question 3. Will my allowable SEP/SIMPLE/401(k) contribution as a Schedule C taxpayer be based only on Schedule C net earnings, or do I first subtract the Section 199A deduction?
Answer 3. You’ll continue to use Schedule C net earnings with no adjustment for Section 199A.
Question 4. Is my qualified business income for the Section 199A deduction reduced by either bonus depreciation or Section 179 expensing?
Answer 4. Yes, to both.
Question 5. I took out a loan to buy S corporation stock. The interest is deductible on my Schedule E. Does the interest reduce my Section 199A qualified business income?
Answer 5. Yes, in most circumstances.
Question 6. The out-of-favor specified service trade or business does not qualify for the Section 199A deduction, correct?
Answer 6. Incorrect.
Looking at your taxable income is the first step to see whether you qualify for the Section 199A tax deduction. If your taxable income on IRS Form 1040 is $157,500 or less (single) or $315,000 or less (married, filing jointly) and you have a pass-through business such as a proprietorship, partnership, or S corporation, you qualify for the Section 199A deduction.
With taxable income equal to or below the thresholds above, your type of pass-through business makes no difference. Retail store owners and medical doctors with income equal to or below the thresholds qualify in the same exact manner.