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Section 199A Tax Deductions Recap: What the Pros Are Saying

by
Lauren Detweiler
on
12/11/2018
Section 199A Tax Deductions Recap: What the Pros Are Saying

Tax season is coming, and there were endless changes to the tax code this year that will affect Americans across the board. In this month's #TaxBuzzChat, we discuss one of more complicated revisions: Section 199A. Interest in this topic has skyrocketed in 2018, with Google searches for "199A" quadrupling over the same time last year. Our chat with industry leaders, tax experts and small business owners covered valuable insights such as:

  • Have you, or do you expect to, see an increase in your billable hours/fees because of Section 199A and pass-through entities?
  • For a qualified trade or business how is the Sec 199A deduction computed when the taxpayer's taxable income without regard to the Sec 199A deduction exceeds the $207,500/$415,000 caps?
  • How is the wage limitation determined?
  • What is qualified business property?
  • What is the "depreciable period" for Section 199A purposes?
  • Is self-employment tax affected by the Sec 199A deduction?
  • When there are multiple business activities, are they combined before computing the Sec 199A deduction?
  • How are business activity losses treated?

We know this is a busy time of year, so thank you to everyone who participated today! These are just a few of the questions the pros discussed and debated in today's very active live Twitter chat session, so be sure to check out some highlights of our chat below.

@TaxBuzzOnline will be hosting our next #TaxBuzzChat on Wednesday, January 9th at 10am PT/ 1pm ET. We'll be discussing Your Favorite Tax Planning Strategies for 2019!  Don't miss out on this chance to share your insights with peers and  Tweet us if there are topics that you'd like to chat about or have questions about.

Q1. Have you, or do you expect to, see an increase in your billable hours/fees because of Section 199A and pass-through entities? #TaxBuzzChat pic.twitter.com/l7TaQfgw69

#taxbuzzchat A1. Frankly, the C corp option might really be more interesting and less trouble. With lower tax rates and low tax rates for dividends, it might be less trouble and more profitable

A1: I don't have clients/billable hours, but generally, there's been a lot of concern in the industry about the choice of entity to go with because 199A. #taxbuzzchat

A1. During the @BloombergTax #BTAXForum the other week, a number of panelists discussed how there's a lot more stability with C-Corps; some of them expect to see more conversions from pass-throughs to C-Corps. #taxbuzzchat

There's always a catch somewhere, isn't there? #taxbuzzchat

Oh, stability was my own oversimplified spin on it - basically, if you can't take 199A for individual, C-corp looks better #taxbuzzchat

I think I'd have to go with the standard lawyer answer - it depends! There are so many variables in any situation - business and political. I'd also want to see what guidance comes out, and if it looks like there'd be future bills changing the new tax law. #taxbuzzchat

Haha, it's an answer for all situations. During the 199A panel, there was a lot of discussion about how businesses need to look at future goals in making decisions. #taxbuzzchat

Hence the importance of #business owners working with qualified #tax pros. #TaxBuzzChat

Very true. One practitioner has referred to converting to C corp like a part of the Hotel California song - you can check in anytime you like but you can never leave. #taxbuzzchat

Well a nice bonus for all the tax education needed to deal with the changes. #TaxBuzzChat

Of course, but the amount of the increase will depend upon whether I am dealing with just K-1s which include the data needed or preparing a business activity return where I must make significant determinations. #taxbuzzchat

A1 - generally, yes. But for some taxpayers (with taxable income below the thresholds), a fee increase may not be necessary.

A1: I agree with @ShuanHunley. I believe that most of increase will come from the planning and education.

A1: Probably as a general increase of tax return prep fees - don't hourly bill, so will add a flat fee number to returns. #TaxBuzzChat

#TaxBuzzChat A1 I should not apologize but yes Taxpayers cost will have to go up. It's more than just letting the program do the work.

A2. SSTB has definitely a major headache for pass-through entities. #taxbuzzchat

A2 Most seem to upset with the limitations placed on SSTBs. Don't think it is fair. #taxbuzzcha

A2 - they don't understand why some trades or businesses are SSTBs and why some are not. I'm not sure I fully understand the rationale for some industries, but that's the law.

Because it is not what they want to hear. #TaxBuzzChat

#TaxBuzzChat A2 it's been those under the SSTB. Manly my Dr and other highly paid employees.

Now, on to the technical stuff. Not all of the answers are cut and dry, though we think we know the answers. We are looking for a variety of input and planning ideas to make this #TaxBuzzChat a vital resource. Here we go...

A3 - not really. However, it matters to the business entity because it still has to disclose whether it is an SSTB (per the proposed regulations). #TaxBuzzChat

a3: Nornally not as they qualify - the only issue is reducing the deduction calculation by reasonable compensation (they always want to reduce that to avoid social security so now that want to max the 199A too.) #TaxBuzzChat

A3. No.  At least not in that year #TaxBuzzChat

A3. No. When a taxpayer's taxable income is below the thresholds, the Sec 199A deduction for the activity is a simple 20% of qualified business income (QBI) for any type of business activity other than a cooperative. #TaxBuzzChat

A3: our answer to that would also be no for this current year based off the rules we are seeing now. Obviously the only ones that do matter are the ones that fall above the threshold amounts. #TaxBuzzChat

Q3:  No!  Keep it simple.  Apply the overall taxable income limit, but deduction should be easy to calculate in this case! #TaxBuzzChat

Q4. How is the Sec 199A deduction determined for a specified service trade or business once the taxpayer's taxable income without regard to the Sec 199A deduction for that activity is between the $157,500/$315,000 threshold amounts and the $207,500/$415,000 caps? #TaxBuzzChat pic.twitter.com/gP0I5Fw15t

A4. For a specified service trade or business the Sec 199A deduction phases out between the $157,500/$315,000 threshold amounts and the $207,500/$415,000 caps. #TaxBuzzChat

A4:  If a service business the 199A calculation will be phased out in that range. #TaxBuzzChat

A4: =((B1*(1-((B4-B5)/B6)))*0.2)-((IF(((B1*(1-(B7/B6)))*0.2)>(MAX(((B2*(1-(B7/B6)))*0.5),((B2*(1-(B7/B6)))*0.25+(B3*(1-(B7/B6)))*0.025))),((B1*(1-(B7/B6)))*0.2)-(MAX(((B2*(1-(B7/B6)))*0.5),((B2*(1-(B7/B6)))*0.25+(B3*(1-(B7/B6)))*0.025))),0))*(B7/B6))

B1=QBI

B2=Wages

B3=prop

B4=TI

My head hurts. #TaxBuzzChat

Can I paste that into any excel cell and have a 'cheat sheet'? #TaxBuzzChat

A4: We developed worksheets early on. Save the headaches.  #taxbuzzchat

This chart might help as well. #TaxBuzzChat pic.twitter.com/1OPKeOu8MZ

A4:  I believe QBI is reduced pro-rata by the % that taxable income exceeds the lower threshold.  IE - if TI (for MFJ) is $365K (1/2 way between $315K and $415K thresholds), then QBI is reduced 50% and therefore, the QBID is reduced 50%.  #TaxBuzzChat

A5 - non-SSTB = 20% of QBI subject to wage/investment limit; SSTB = no deductible amount #TaxBuzzChat

A5. Once the TP's taxable income without regard to the Sec 199A deduction exceeds the $207,500/$415,000 caps, the Sec 199A deduction is the lesser of 20% of QBI or the wage limitation. #TaxBuzzChat

A5: Taking salary into account as well as property and calculating the 199A based on those factors. #TaxBuzzChat

Q6. How is the wage limitation determined? #TaxBuzzChat pic.twitter.com/WLX5gyobqI

A6. The wage limitation is the greater of (1) 50% of the business activities W-2 wages (including S-corp shareholders wages) or... (1/2) #TaxBuzzChat

A6. (2) 25% of the business activities W-2 wages (including S-corp shareholders wages) plus 2.5% of the unadjusted basis of the business's qualified property. (2/2) #TaxBuzzChat

No need to apologize! I think we all love seeing what other tax people are interested in learning! #taxbuzzchat

A6 - greater of 50% of W-2 wages or 25% of wages + 2.5% of unadjusted basis of qualified property #TaxBuzzChat

Q7. What is qualified business property? #TaxBuzzChat pic.twitter.com/5HFe81Rvz5

A7: Qualified Property is tangible, depreciable property held by & used by the business in the production of QBI at the end of the tax year & for which the Depreciation Period has not ended (10 years after property put in service or last day of Sec 168 Recover period #TaxBuzzChat

A7. Qualified business property is the unadjusted basis of tangible property (less land) that is held by, available for use by and used at any point during the year by the business activity during the property's depreciable period in the production of QBI. #TaxBuzzChat

What's your thought on depreciable property deducted under the de minimis tangible property exception?  Is this included in the limitation calculation?  Or not because it was already fully deducted and is not being depreciated?  #taxbuzzchat

Good point.

At least the 100% bonus and Sect 179 assets *should* be on the tax depreciation schedule.  #fingerscrossed #taxbuzzchat

A7 - depreciable tangible property (1) used to produce QBI, (2) available for use at the end of year, and (3) depreciable period hasn't ended (later of 10 years or MACRS period). Yes, you have to track depreciation separately! #TaxBuzzChat

A7: #taxbuzzchat everything you didn't write off on your cost segregation study that everyone told you you NEEDED to do 3 years ago

A7: everything else. 🙃 thank god for the software this year. #TaxBuzzChat

A8 - later of (1) 10 years or (2) last day of last full year in MACRS recovery period #TaxBuzzChat

A8. With regard to the 199A deduction, the depreciable period begins on the date the TP first places the property in service and ends the later of (a) 10 yrs after the place in service date or (b) the last day of the of the last full yr of the MACRS recovery period. #TaxBuzzChat

Hah - It is called job security. #TaxBuzzChat

A8: Later of ten years from first put into service or recovery period under sec 168. #TaxBuzzChat

Q9. TP's taxable income, without regard to the Sec 199A deduction, exceeds the $207,500/$415,000 caps. The activity is a qualified trade or business with $100K of QBI, does not pay any wages and has no qualified property. What is the 199A deduction for this activity? #TaxBuzzChat pic.twitter.com/gUPS22XaJc

A9. Once a TP's taxable income, w/o regard to the Sec 199A deduction, exceeds the $207,500/$415,000 caps the 199A deduction is the lesser of 20% of QBI or the wage limitation. W/o wages or qualified property the wage limit would be zero thus so is the 199A deduction. #TaxBuzzChat

A9:  $0.  #taxbuzzchat

Q9: #TaxBuzzChat Zero, but put that qualified trade or business in an ESBT and now we're on to something.

#taxbuzzchat Yep, easy to calculate. Not quite as fun to explain to clients, right?

A9. Time to add fun graphics and interpretive dance... #taxbuzzchat

A10 #TaxBuzzChat YASSSS!!!!.  Depends on the entity choice.  I think sole proprietor, the employer's portion of SE taxes do not reduce 199A, but then look at the difference with a C Corporation or S Corporation, wages to owners, the employer's portion of SE taxes is reducing 199A

True but it still will not affect the calculation of those taxes as they are calculated as part of the payroll.

True - and it doesn't affect AMT

A10: No because it is applied after you get to taxable income. #TaxBuzzChat

A11 - no #taxbuzzchat

A11. No. When computing the Sec 199A deduction, guaranteed payments to partners are not included in QBI and not treated as wages for the wage limitation. #TaxBuzzChat

HaHa  #taxbuzzchat

A11: No they are not included. #TaxBuzzChat

A12 - generally, no. But the proposed regulations allow you to aggregate trades or businesses #TaxBuzzChat

I've heard rumors the IRS will change the aggregation rules in the final regulations. Who knows?!? #TaxBuzzChat

Probably not that early.

re: A12. Definitely suspenseful! #taxbuzzchat

A12. No, the Sec 199A deduction is first determined separately for each business activity (or aggregated business activities) and then combined and limited to 20% of the taxpayer's taxable income, before the Sec 199A deduction and less net capital gains. #TaxBuzzChat

A12: Usually no, but you can aggregate businesses. #TaxBuzzChat

A13. For a net QBI loss, the QBI of each activity is set to zero, & excess losses are carried over to the subsequent yr. When there are losses but net is positive, QBI of the negative activities is set to zero, & the excess proportionally reduces the positive QBI's. #TaxBuzzChat

So we have another thing to keep track of.  🙄

Tax simplification at its best!

A13: after aggregating QBI and QBI losses from all businesses if there is a net loss no QBI is available to take the 199A deduction, plus the loss is carried over to the next year to reduce QBI then.  That Stinks. #TaxBuzzChat

We hope this topic wasn't too much for a Twitter chat. But we thought worthy information. See you next time. #TaxBuzzchat

-- TaxBuzz.com (@taxbuzzonline) December 12, 2018

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Lauren Detweiler

Lauren Detweiler

I am equal parts marketer, traveler, and writer, and I've been doing all three for as long as I can remember. I have spent most of my time since graduating university traveling and working remotely in Africa and Europe. My passion lies in conveying the right messaging to the right people, and being a part of the CountingWorks and TaxBuzz team means I get to do that not only for our company, but for clients across the country as well.

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