Tax Cuts and Jobs Acts of 2017: Tax Implications of the new §199A Qualified Business Income Deduction

By Jennifer Kobylarz, CPA, MST
 
The Tax Cuts and Jobs Act, passed in December 2017, created a new deduction under §199A. This deduction allows for all non-corporate taxpayers (i.e. individuals, trusts, and estates) to deduct:
  • A maximum of 20% of Qualified Business Income (QBI)
  • PLUS – 20% of Real Estate Investment Trust (REIT) dividends
  • PLUS – Qualified Publicly Traded Partnership (PTP) income
*S-Corporations and Partnerships which generate QBI pass the deduction through to the individual owners.

The deduction is calculated based on the amount of taxable income reported by the taxpayer.

The Threshold Amounts for 2018 are:

$315,000 for married filing joint (MFJ)

or

$157,500 for all other filers.

The Phase-Out Limits are:

$415,000 for MFJ

or

$207,500 for all other filers.

If…

  • Your taxable income is below the threshold amounts noted above, your deduction could be as simple as multiplying QBI by 20%. The actual deduction would be that amount, up to a maximum of 20% of your taxable income.
  • Your taxable income is over the threshold amounts, the deduction is a bit more complicated. It is still 20% of QBI, but you must have paid a sufficient amount of W-2 wages to your employees or own an adequate amount of qualified property. The 20% deduction is limited to the greater of 50% of the W-2 wages paid or 25% of W-2 wages paid plus 2.5% of the original cost of qualified property.

For various reasons, many taxpayers who operate a business and own real estate hold their real estate outside of the operating entity. Fortunately, the IRS has provided rules for aggregating businesses so that you can combine the qualified business income, W-2 wages, and cost of qualified property in determining if the deduction is limited.

To qualify for aggregation, each of the businesses must:

  1. Have similar ownership (there are specific rules on this that are outside the scope of this article, but if you own 50% or more of each entity, you will likely meet this criteria);
  2. Be on the same tax year;
  3. Not be a Specified Service Trade or Business (another topic that is outside the scope of this article, please contact our office for additional information); and
  4. Meet two of the following criteria:
    • The trades or businesses provide products or services are the same or are customarily offered together;
    • The trades or businesses share facilities or share significant centralized business elements (i.e. personnel, accounting, legal, manufacturing, purchasing, human resources, or information technology resources); or
    • The trades or businesses are operated in coordination with, or reliance upon, one or more of the businesses in the aggregated group.

These aggregation rules mean that many of our clients may be able to aggregate their business and real estate operations when determining their 199A deduction. The W-2 wages paid by the operating entity can be used to allow the QBI from real estate activities to qualify for the deduction, whereas the real estate entity may not have had a sufficient amount of wages or original cost of qualified property to qualify for the full 20% deduction.

Each taxpayer will have their own set of specific tax circumstances which can impact the availability for this deduction. Please contact our office for an analysis of your business to see how this deduction may be able to reduce your 2018 tax bill.

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