Section 199A Benefits Investors

Section 199A Benefits Investors

The Tax Cuts and Jobs Act was passed by Congress and signed into law by President Trump. It added Section 199A to the Internal Revenue Code. IRS Section 199A Benefits Investors.

Section 199a is a new Section of the Internal Revenue Code. It allows a deduction for small to medium sized business owners for pass through entities.. Pass through businesses are usually found on Schedule C of a personal income tax return or Form 1040.

History

When drafted in 2017 there was a significant question about whether landlords would be eligible to take this deduction when calculating their income tax. Since then the IRS has answered the question. The answer is yes.

Caution

Don’t get too excited, Meet with your tax professional to see if you qualify. Everyone’s return is different, Keep this in mind and see if it will help you.

The deduction for QBI is subject to several adjustments and restrictions.  Just because a taxpayer has QBI income it does not automatically entitle that taxpayer to the QBI deduction.

Qualified Business Income (QBI)

The Tax Cuts and Jobs Act (TCJA) created a new category of income known as “Qualified Business Income” (QBI). “IF” the taxpayer has QBI, they “MAY” be able to deduct “UP TO” 20% of that amount.

Section 199A of the IRC impacts many business owners. Do you own a sole proprietorships, partnerships or S corporation? Are you involved with trusts and estates? Then you may qualify for a deduction of income from a qualified trade or business. The deduction has two components.

QBI Component

This component of the deduction equals 20 percent of QBI from a domestic business. That means the business must be operated inside of the united States or it’s territories. The business needs to be operated as a sole proprietorship, partnership, S corporation, trust or estate.

Depending on the taxpayer’s taxable income, the QBI component is also subject to multiple limitations. This includes the type of trade or business, the amount of W-2 wages paid by the qualified trade or business. Additionally the owner must allows for the unadjusted basis immediately after acquisition (UBIA) of qualified property held by the trade or business.

Farmer’s Beware

QBI may also be reduced by the patron reduction if the taxpayer is a patron of an agricultural or horticultural cooperative.

C Corporations Excluded

Income earned through a C corporation or by providing services as an employee is not eligible for the deduction.

Section 199A Benefits Investors

Are you qualified? If so you may take a deduction from taxable income of up to 20% of QBI is allowable. 

First, you must understand that QBI exists only to the degree that a taxpayer has pass through income.  This occurs in a few ways. First, when an individual is self-employed and files a schedule C along with their personal 1040. It also occurs when they are a partner in a partnership or an owner of an s corporation.

LLCs are Disregarded

Being organized as an LLC has no bearing on whether or not a QBI deduction can be made.

A single member LLC is disregarded by the IRS. What matters is the tax filing status claimed by your LLC. The tax filing status is the first thing to be determined.

Do you have income on a Federal 1040 – Schedule C? Do you receive income listed on a K-1 issued by either a partnership or an S Corporation? If so you may have QBI.

Earned Income

Earned income is something paid to you by an employer or you pay to yourself, that is subject to self employment tax. Yes the dreaded “F” word FICA!

Just remember that “Earned Income” aka wages, guaranteed payments to partners and income from capital gains (short or long term) is not QBI.  Only the profits generated by a business will always be qualified business income. 

SAFE Harbor for Landlords

Safe Harbor Regulations have been issued by the IRS. If your company deals with rental properties, the management of those properties must exceed a minimum of 250 hours per year in managing those properties. When this is the case then rental income earned by your company may be considered QBI and be eligible for the deduction.

Hopefully never, but if and when you are audited you will need to prove to the IRS that the business does indeed take up 250 hours of your time.

QBI Calculation

The owner is entitled to a deduction of up to twenty percent of the company’s QBI. 

Example: The company’s gross income is $100,000. After subtracting payroll and other expenses it shows a net income of $50,000 for the year. The net income equals QBI and the deduction would be $10,000.  This allows the business / owner to pay taxes on $40,000 of business income. This is instead of the $50,000 of profit that was earned. The amount saved would depend on the taxpayers tax bracket but could be up to $2,000.00 or more.

Restrictions

The QBI reduction may be reduced for a few reasons. If your taxable income is low. You have significant capital gains. Even if you are in a higher tax bracket due to your income.  There are dozens of adjustments to the deduction that can take place. For further clarification see your income tax advisor.

Summary / Disclaimer

Make sure to discuss the QBI with your tax advisors. This article is for informational purposes and should not be considered tax advice. Check with your tax professional because, many aspects of the Tax Cuts and Jobs Act are still being analyzed and implemented. Seek competent professional advice when preparing your taxes. If you are Preparing your taxes, by yourself, while using an online program is not seeking competent tax advice. Get with a professional who studies the tax laws.

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