Section 199A of the Internal Revenue Code was introduced as a part of the Tax Cuts and Jobs Act of 2017. This section allows eligible taxpayers to deduct up to 20% of their qualified business income (QBI) from a qualified trade or business. The provision aims to provide tax relief to small business owners and pass-through entities, such as S corporations, partnerships, and sole proprietorships. Understanding what constitutes a qualified trade or business under Section 199A is crucial for taxpayers seeking to maximize their tax benefits.
What is a qualified trade or business under Section 199A? A qualified trade or business under Section 199A is any trade or business except for a specified service trade or business (SSTB) and the trade or business of performing services as an employee. An SSTB includes fields such as health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, and any trade or business where the principal asset is the reputation or skill of one or more of its employees or owners.
To qualify for the deduction, the trade or business must generate qualified business income (QBI), which is the net amount of qualified items of income, gain, deduction, and loss from any qualified trade or business. The QBI must be connected with a U.S. trade or business and does not include investment income, such as capital gains, dividends, or interest income. Additionally, the deduction is subject to certain limitations based on the taxpayer’s taxable income and the type of business.
Specified Service Trade or Business (SSTB)
Specified service trade or businesses (SSTBs) are excluded from the 20% deduction if the taxpayer’s taxable income exceeds certain thresholds. These thresholds are $157,500 for single filers and $315,000 for married couples filing jointly, as of the 2018 tax year. SSTBs include professions like health, law, accounting, and consulting, among others. If a taxpayer’s income exceeds these thresholds, the deduction phases out over a range of $50,000 for single filers and $100,000 for joint filers.
Limitations and Exclusions
There are several limitations and exclusions to consider when determining eligibility for the Section 199A deduction. For example, the deduction is limited to the lesser of 20% of the QBI or 20% of the taxpayer’s taxable income minus net capital gains. Additionally, the deduction is further limited by W-2 wages paid by the business and the unadjusted basis immediately after acquisition (UBIA) of qualified property held by the business. These limitations aim to ensure that the deduction benefits businesses that contribute to job creation and investment in qualified property.
In summary, a qualified trade or business under Section 199A must meet specific criteria to be eligible for the 20% deduction on qualified business income. While most trades or businesses qualify, specified service trades or businesses face additional limitations based on taxable income thresholds. Understanding these rules and limitations is essential for taxpayers seeking to take full advantage of the tax benefits provided by Section 199A.