Maximizing The IRC § 199a Deduction

Taxpayers who qualify for the IRC § 199A deduction (the “Deduction”) will be one of the big winners under the Tax Cuts and Jobs Act (the “2017 Tax Act”). IRC § 199A offers a deduction equal to 20% of the taxpayer’s skilled business income (at the mercy of the modifications and limitations talked about below). But for many taxpayers, maximizing the Deduction shall require careful planning.

Attorneys at Frost Brown Todd are suffering from substantial experience assisting closely-held business clients using their entity taxes planning and governance issues, and in particular founders arranging S and LLC’s companies. Contact Scott Dolson or any other person in the Tax Law Practice Group if you want assistance or would like more information. Who may take advantage of IRC § 199A?

The benefits of IRC § 199A are potentially open to any taxpayer apart from a C company. Eligible taxpayers include those operating as sole proprietorships (including single-member LLCs), LLC S, and associates corporation shareholders, and trusts and estates. The Deduction is being referred to as a “pass-through entity” deduction, however the scope of eligible taxpayers isn’t limited by pass-through entities. Many taxpayers will never be eligible for the Deduction. Wage earners won’t be eligible for the Deduction unless they have other business income. Capital benefits, dividends, interest income, and certain other categories of income won’t supporting a Deduction.

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The Deduction doesn’t help if a small business is producing only losses. For instance, the Deduction can be skipped completely if a start-up has deficits in the first years and then is sold in a purchase qualifying for capital increases treatment. If a taxpayer’s taxable income level exceeds certain limits, the availability and amount of the Deduction will be limited as discussed below.

If the taxpayer is involved in certain service and professional activities, the Deduction will phase out at certain income levels entirely. The preceding paragraph identifies only a few of the key factors that go into determining eligibility when planning on taking the Deduction. The balance of this article works through the rules in some fine detail but shouldn’t be considered an alternative for individualized taxes planning or advice. Taxpayers who’ve multiple sources of business income will work closely with their advisors to ensure that they configure their business possession arrangements in a manner that maximizes their Deduction.

For purposes of staying away from additional complication, the use of the Deduction to agriculture and horticulture cooperative income, experienced cooperative dividends, experienced real estate investment trust (REIT) dividend income, and experienced publicly traded collaboration income has been excluded from this article. Each one of these types of income may be eligible for the Deduction. The Deduction will be determined with an annual basis.

The Deduction is based on a taxpayer’s “qualified business income.” The Deduction is dependent on a taxpayer’s competent business income. Qualified business income generally means a taxpayer’s net (after deductions, including W-2 income and other expenditures of the business) trade or business (i.e., ordinary) income effectively connected to the United States or Puerto Rico. Excluded from a taxpayer’s competent business income is income, partnership guaranteed payments for services, capital gains, annuities, dividends, interest income not allocable to a business or trade, and any deduction related to these things. Rent and other common income from real property activities qualify for the Deduction.