Basics of IRC Section 199A Deduction for Qualified Business Income
Section 199A allows sole proprietors, owners and shareholders of pass through entities a deduction equal to 20% of the taxpayer’s qualified business income, (“QBI”).
QBI, subject to certain modifications, is income from a trade or business with two exceptions:
Section 199A contains numerous exceptions and limitations. For example, the SSBT limitation (and the wage limitations described below) do not apply if the taxpayer’s taxable income is below $315,000 for married couples filing jointly and $157,500 for all other taxpayers. If the taxpayer’s taxable income for married filing jointly is between $315,000 and $415,000 there is a phase-out of the deduction and the phase-out is applicable for other taxpayers with taxable income of between $157,500 and $207,500.
For taxpayers with QBI above the amounts in the preceding paragraph the 20% deduction the deduction will be equal to:
- THE LESSER OF:
20% of the taxpayer’s QBI; or
- THE GREATER OF:
50% of the taxpayer’s allocable share of the W-2 wages with respect to the business; or
25% of the taxpayer’s allocable share of W-2 wages with respect to the business plus 2.5% of the taxpayer’s share of the unadjusted basis of all qualified property.
Issues to be addressed include the following:
- Can all entities under common control be aggregated in calculating the 20% deduction?
- Can the compensation of shareholders in an S corporation be reduced in order to increase the amount of QBI subject to the 20% deduction?