Computing New Tax Law Business Deductions - By Kelly J. Bullis
Updated: Feb 13
The New Tax Law officially known as “Tax Cuts and Jobs Act of 2017” has a section in there for non-C Corporations to deduct up to 20% of their “qualified business income.” In the CPA universe, we are now affectionately referring to that as the “Section 199A deduction.”
In my simple world, there would be one tax rate applied to all businesses, regardless of how their results are reported to the IRS. For a non-incorporated sole-proprietor, that might be on Schedule C of their Personal Income Tax Return. For “pass-through entities” such as Partnerships and Sub-S returns, the income is still passed through to the owner’s Personal Income Tax Return. All of the above are now affected by the “wonderful” Section 199A process.
You can thank various Senators for adding multiple levels of complexity to what started out as a fairly simple and straight forward concept. We now have it, warts and all, and once the average business owner sees how it works, I think they will still be pleased, if not a bit confused.
Let’s get one thing straight. There is a discriminatory limitation on service-based entities (Licensed Professionals such as Doctors, Attorneys, Financial Services, Accountants, etc.) and now expanded to 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.” If your business is one of these, you have an additional limitation to apply. If your Taxable Income is less than $157,000 ($315,000 for Married Filing Joint), you start losing the Section 199A deduction. It phases out over the next $50,000 ($100,000 for Joint filers).
How does one compute this Section 199A deduction. Simple! Follow along: FIRST, you compute 20% of your Qualified Business Income (QBI). SECOND, you compare it to the greater of Step A-50% of your total Wages Paid OR Step B-25% of your total Wages Paid PLUS 2.5% of the unadjusted basis (before any depreciation expense taken) of qualified property (normally, property used in the trade or business that hasn’t been fully depreciated yet). If your 20% item FIRST computed is lesser than the result of the SECOND computation, you take the FIRST. If the SECOND is lesser than the FIRST, then you use the amount computed in the SECOND process. Like I said, Simple!
Let’s do a real scenario. QBI is $150,000. Total Wages Paid is $400,000. Qualified property is $750,000. Thus, FIRST QBI $150,000 x 20% = $30,000. SECOND Step A-Wages $400,000 x 50% = $200,000 OR Step B-Wages $400,000 x 25% = $100,000 PLUS Property $750,000 x 2.5% = $18,750. Step B total is $100,000 + $18,750 … $118,750. The Step A-50% Wages of $200,000 is greater than the Step B-Wages/Property of $118,750. Thus, taking the greater of Step A or Step B, the result is Step A’s $200,000. The FIRST computation of 20% of QBI ($30,000) is lesser than the SECOND result of $200,000, thus, this business owner gets to take the full 20% Section 199A deduction of $30,000. That drops their taxable portion of the Qualified Business Income from $150,000 to $120,000 ($150,000 – Section 199A of $30,000).
Did you hear? Esther 2:18 “Then the king gave a great feast …He also granted a remission of taxes to provinces and gave gifts with royal generosity.”
Kelly Bullis is a Certified Public Accountant in Carson City. Contact him at 882-4459. On the web at BullisAndCo.com Also on Facebook.