New Section 199A deduction could provide additional business tax savings

The Tax Cuts and Jobs Act of 2017, Regulation 11011, Section 199A, has provided a 20% tax deduction for transfer companies. Eligible taxpayers include sole proprietors, S corporations, partnerships, publicly traded partnerships (PTPs), and real estate investment trusts (REITs). While calculating the deduction could be a difficult challenge at best, many taxpayers could end up adding to their bottom line.

Section 199 A, also known as the qualified business income deduction, has two main components as follows:

1. Eligible taxpayers may be entitled to a deduction of up to 20 percent of Qualified Business Income (QBI) from a domestic business operated as a sole proprietorship or through a partnership, S corporation, trust, or estate. For taxpayers with taxable income in excess of $315,000 for a married couple filing jointly, or $157,500 for all other taxpayers, the deduction is subject to limitations such as the type of industry or business, the taxpayer’s taxable income, the amount of W-2 wages paid by qualifying business or industry and unadjusted basis immediately after acquisition (UBIA) of qualifying business or industry property. Income earned through a C corporation or by rendering services as an employee is not eligible for the deduction (www.irs.gov).

2. Eligible taxpayers may also be entitled to a deduction of up to 20 percent of their combined dividends from qualified real estate investment trusts (REITs) and qualified income from publicly traded companies (PTPs). This component of the section 199A deduction is not limited by W-2 wages or the Qualifying Property UBIA (www.irs.gov).

At this point, you may be wondering how an S-Corporation, Partnership, PTP, or REIT qualifies as a taxpayer when these business structures are considered “stand-alone” entities. Well, the answer to that question is that all of the aforementioned business structures report each partner’s or shareholder’s portion of Qualified Business Income (QBI), W-2 wages, the unadjusted basis immediately upon acquisition of the qualifying property. (UBIA), qualified REIT dividends, and qualified PTP income in the K-1 program. The deduction is then determined for the applicable taxpayers.

A qualified trade or business, as defined by the IRS, is any trade or business, except a specified service trade or business that involves the rendering of services in accounting, healthcare, law, actuarial science, performing arts, consulting, athletics, financial services, investment, investment management, trade or any trade or business in which the main asset is the reputation or skills of one or more of its employees. The only exception applies if the taxpayer’s taxable income exceeds $315,000 for a married couple filing jointly, or $157,000.00 for everyone else. This exception also applies to taxpayers who perform services as employees (www.irs.gov).