Qualified Business Income Deduction – Section 199A

The Tax Cuts and Jobs Act (TCJA) adds a new deduction for noncorporate taxpayers for qualified business income. The deduction reduces taxable income, rather than adjusted gross income, and is available to taxpayers who qualify, even if they take the standard deduction. The deduction is 20% of the taxpayer’s qualified business income (QBI) from a partnership, S corporation, or sole proprietorship and is subject to certain wage/property limitations (50% of W-2 wages or 25% of W-2 wages plus 2.5% of unadjusted asset basis of qualified property). Taxpayers with taxable income under $157,500 for single filers and $315,000 for joint filers are not subject to wage/property limitations, the limit phases in between taxable income of $157,500 and $207,500 for single filers and $315,000 and $415,000 for joint filers.

Income from specified service trade or businesses (SSTB) is not eligible for the deduction unless taxable income is below $157,500 for single filers and $315,000 for joint filers. If taxable income is over the threshold, but within the phase-in range ($50,000 for single filers, $100,000 for joint filers), taxpayers may claim a partial deduction. SSTB’s include any trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or 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. Real estate professionals, including brokers, agents, developers and property managers, architects and engineers are not considered to be SSTB’s. Services performed as an employee are not eligible for the deduction.

Taxpayers with taxable income above the thresholds will not receive a deduction unless they have sufficient wages and/or qualified property. As a result, a high earner real estate broker may want to consider setting up an S Corp and taking a salary or hiring employees in order to be eligible for a deduction. The proposed regulations provide that individuals who have been treated as employees will be presumed to continue to be employees if they are continuing to do the same work for the same employer, even if this is done through another entity such as an S Corp.