Lots of business owners have been contacting us of late, as we’ve developed a bit of a reputation around the Chicago area for helping business owners save a bundle on their taxes.
And many of the business owners in Chicago that we’ve talked to have a similar question:
Can I take the new 20% deduction for qualified business income?
Also known as the “Section 199A deduction”, it’s been the subject of many a conversation around here.
Well, let’s dive in, shall we?
WARNING: Geeky stuff ahead.
Can I Take the Section 199A Deduction For My Chicago Business?
“Geeks are people who love something so much that all the details matter.” – Marissa Mayer
The new Section 199A <nerd alert> is a subset of Section 199 of the tax code that covers “Domestic Activities Production”, and the much-talked-about deduction applies to AGI (adjusted gross income) or “below the line”, rather than to gross income (“above the line”) after which we would arrive at the AGI.
So this makes it even more powerful.
It applies to “pass through” entities and structures, which are as follows:
- Real estate investors (without entity)
- Sole proprietorships (without entity)
- LLCs (both “disregarded entities” — single member — and multi-member LLCs)
- Any entity taxed as an S corp
- Trusts and estates, REITs and qualified cooperatives
The big exception: Specified Service Trade or Businesses (SSTBs). If you happen to operate a business under certain areas, you are NOT able to take these deductions — unless the income of your business falls under a certain threshold. These are as follows:
- Healthcare Providers
- Legal Pros (not just attorneys, but also mediators and paralegals)
- Accountants (blech)
- Performance Artists
- Consultants (basically, if you get paid specifically for “advice and counsel”)
- Athletes (including coaches, managers, etc.)
- Financial Service Providers (again, when “advice and counsel” is required — so bank tellers, etc. are not part of this)
- Brokerage Services (not including real estate and insurance brokers)
- Investment Advisors and Managers (not including property managers)
- Securities Dealers
And the big one:
- Trade- or Skill-Dependent Businesses. Specifically, the regulations include “any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners.”
That final one still hasn’t been fully clarified, so we’ll be watching the courts and further regulations on that.
I mentioned that income threshold. If your business falls under one of the above categories, BUT your taxable income is less than $157,500 for a single return / $315,000 for joint, then the 20% deduction is fully available. If your taxable income is greater than $157,500/$315,000 but less than $207,500/$415,000 then a partial deduction is available. But if your taxable income is greater than $207,500/$415,000 then you do NOT qualify for this deduction.
If your business happens to NOT fall under these categories, then there are still some phaseouts. If your taxable income is less than $157,500 for a single return / $315,000 for joint, then the 20% deduction is fully available. If your taxable income is greater than $157,500/$315,000 but less than $207,500/$415,000 then a partial deduction is available with some asset and W-2 calculation. And if your taxable income is greater than $207,500/$415,000 then the good news for “non-SSTB” businesses is that there are still partial deductions possibly available, depending on depreciable assets and W-2 limits.
Now, the calculation of what this income actually is happens to be where we can really get geeky. I will spare you all of the (many) scenarios, and give you the broad strokes:
The following kinds of income are excluded from these QBI calculations…
- Reasonable compensation received from an S corporation by a shareholder — i.e. whatever W-2 salary you might take from your S-corp (which is an important part of an ethical S-corp) cannot be added back into the “QBI” number
- “Guaranteed payments”
- Short- and long-term capital gains (they’re already taxed on the K-1)
- Depreciable asset gains and losses from assets held for over a year and then sold (Section 1231)
- Dividends and interest (unless you are charging actual customers interest on AR that is overdue)
As with everything tax-related, the devil really is in the details.
Which is why I hope you see how important it is to have somebody as geeky as we are by your side. We’re here to help you maximize every possible legal, ethical deduction for your Chicago business. We won’t cross any lines, but suffice to say — we’re in your corner.
And we look forward to helping your business keep as much of its hard-earned revenue where it belongs: in your pockets.
Let us help you … and we’d love to be a resource for your business owner friends as well.
Feel very free to forward this article to a business associate or client you know who could benefit from our assistance — or simply send them our way.
A.L. Taylor and Associates, PC