Are you a Section 199A, and How to Find Out if You’re Eligible? Or, How to Pay Less Taxes.

Tax laws have changed. The Tax Cuts and Jobs Act (TCJA) of 2018 changed many things. No longer can individuals take certain deductions. Whether is a limit on mortgage interest, or no dependent exclusions, things have changed. Some bad, some good.

One of the good changes in the tax code is a change in Section 199A. Here is a layman’s overview of how it may help you, particularly if you are a small business owner.

The new changes give you a 20% deduction on Qualified Business Income (QBI for short). This means you can deduct 20% of certain income you’ve received from your Gross Income when calculating your U.S. annual tax returns.

Let’s start at the beginning. What is QBI? QBI is U.S. Income from business with a few exclusions. If you own a business, Qualified Business Income (QBI) refers to the net income or profit or loss from the business. That means that if your business made $50,000 after all income and expenses, there is a possibility that you can deduct $10,000 from the $50,000 when coming up with what you owe in taxes at the end of the year.

This is called a deduction for pass-through entities. Pass through entities refer to Partnerships, LLC’s, S Corps, and Sole Proprietorships where the income passes through to your personal tax return, usually through the Schedule C.

Is your business a pass-through entity? It is, if you don’t file a separate Corporate Tax Return IRS form 1120. If you do, then you’re not a pass-through entity and the Section 199A deduction doesn’t apply.

The amount of the 199A deduction you can take has a couple of thresholds, the big one being that your taxable income has to be below $315,000 for married filing jointly, and below $157,000 if you file as single. Above this amount you can only take a partial deduction based on if you are a certain type of business, called a specified service trade or business (SSTB), then the deduction is reduced. It gets pretty complicated from their so its best to ask your tax professional if you are above the amounts noted.

The best part of the Section 199A Deduction is that if you are eligible and were paying a top tax bracket of 37%, you’ll now only pay on 80% of that income amount making an effective tax rate of 29.6%.

There’s a quick article on the section 199A deduction online by MYRAWEALTH. The picture they used is a pretty good example. I’ve put the picture from their comments at the top of this article. They even give some ideas for business owners to keep within the range to maximize the deduction.

The bottom line is if you’re a small business owner, you want to check with your tax professional to make sure you’re getting the Section 199A 20% income deduction.

Now go out and impress your CPA, EA, or CTRP by asking him, or her about the Section 199A Deduction, and have a great week.