At Erock, we have been consulting with small business owners since the late 1980s. Many people have run their businesses as non incorporated Schedule C filers, while others have formed partnerships or S-Corporations for many differing reasons. These “passthrough” taxpayers will be entitled to the 20% passthrough deduction (IRS Section 199A), which was created for pass-through businesses so they would get a tax deduction to compete with the massive corporate tax deduction given to C Corporations.
In its most simplest terms, section 199A allows the individual business owner a deduction equal to 20% of qualified income, subject to income limitations for people in “certain trades or businesses” with incomes under $207k for single filers and $415k for marrieds.
For all other eligible businesses, the deduction against income is limited to 50% of taxpayers share of W2 wages from the business or the sum of 25% of the share of the wages plus 2.5% of share of unadjusted basis of the business immediately after the purchase.
Once the first part of the deduction is computed it is added to the 2nd part of the 199A deduction: a deduction for 20% of REIT Income or Partnership Income. Both of these deductions are mutually exclusive and one can be taken without the other applying.
Once the two deductions are added together they are subject to one overall limitation based on 20% of the excess of the taxpayers income over the sum of the net capital gains of the business.
PHEW. As you can see, most of us are not putting our tax returns on a postcard anytime soon. The determination of this qualified deduction is a tricky one and will require guidance for many small business owners along the way. Make sure you take the full deduction for which you qualify. Reach out with any questions!
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About Stu: With more than 29 years of experience as a credentialed tax professional, Stu Steinberg brings a broad depth of knowledge to his work. Stu founded Erock Tax to help provide tax strategies to individuals, families and small businesses. He uses his CPA expertise to help each client navigate their long-term debt and mortgage, gaining them the best deals and rates possible. Stu is passionate about empowering his clients through education about their tax health. He is highly energetic and brings a sense of optimism, creative problem-solving and a deep level of commitment to every Erock client.