Section 199A Tax Deduction

The Tax Cuts and Jobs Act which takes effect in 2018 includes the new 199A tax deduction for pass-through businesses such as S corporations, LLC’s and partnerships. This deduction offers a favorable tax treatment equal to a deduction of 20% of a taxpayers qualified business income. Because of this new deduction, tax planning and tax projections are more important than ever as there are several issues to consider ensuring that each taxpayer is operating in the correct legal structure and to also ensure that they receive the maximum deduction allowable to them per the law. Some of the items that need to be taken into consideration include…

Is the business a specified service business which is defined as a business in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, and financial or brokerages services. The 199A deduction is phased out for these businesses depending on the taxpayer’s income. For taxpayers filing married joint the deduction phases out between $315,000 and $415,000. For single taxpayers, the deduction phases out is between $157,500 and $207,500. For service businesses, the taxpayer loses out on the 199A deduction when their income exceeds those income ranges.

For non-service businesses, the same phase out thresholds apply, but they potentially might still receive the 199A deduction. For income above the state thresholds, the deduction is limited to the lesser of the following:

  • 20% of their qualified business income, or
  • The greater of:
  1. The sum of 25% of the W-2 wages of the business and 2.5% of the unadjusted basis immediately after acquisition of all qualified property, or
  2. 50% of all W-2 wages for the business

There are several complexities involved with tax planning related to this new deduction in 2018. It might make sense for certain business owners to increase their W-2’s to take advantage of the new deduction. Additionally, it might make sense for some entities such as Schedule C sole proprietorships and single member LLC’s to incorporate and become S corporations.

We can assist with these difficult tax and accounting issues and make sure that you and your businesses are set up in the more effective and efficient structure. Please give us a call at 847-827-8100 if you’d like to discuss your tax situation or check our website at for more details.