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Understanding and Utilizing the 199A Deduction

The Tax Cuts and Jobs Act of 2017 is rich with new provisions that will allow us as taxpayers to keep more of our hard earned money in our own hands and flowing through the economy. The best example of this is a new deduction for businesses known as the 199a Deduction.  Now this particular deduction can be challenging to understand. So we at Hindsight Financial are here to explain to you the the most important parts of this provision in the tax reform bill.

What is it?

The section 199A deduction is a provision in the new tax bill that provides owners of pass-through business entities the opportunity to deduct 20% of their earnings from that year’s income when they go to file their Federal Tax Returns in the following year.

Pass-through businesses are entities in which the individuals who own the businesses pay taxes as individuals on their income, taking into account net profits. This is done instead of the individuals paying separate taxes as a business entity. Qualified businesses include sole proprietorships, S corporation shareholders, partners who are involved in partnerships, and select real estate investors. It does not include employees.

The thinking behind the deduction is that the resulting savings will mirror the major tax cuts that the new tax bill grants to C-Corporations, which could encourage innovation and reinvestment in business in the United States.

How Much is the Deduction?

This deduction applies to QBI, or “Qualified Business Income”. Qualified business income is the net amount of qualified items of income, gain, deduction, and loss with respect to a qualified trade or business that is effectively connected with the conduct of a business within the United states. The amount of the deduction is the greater of the following:

·  The sum of 50% of W-2 Wages, with respect to the qualified entity.

·  The sum of 25% of W-2 wages, with respect to the qualified entity, added to 2.5% of the adjusted basis immediately after the acquisition of all qualified property.

This resulting deduction is then limited to 20% of the excess of:

  ·  The taxable income of the year, over

  · The sum of net capital gain (as defined in section 1(h)).

We can demonstrate this with an example:

Let’s say that in 2018, a married taxpayer, John, has $100,000 of qualified business income, $100,000 of long-term capital gain, and $30,000 of deductions. The taxable income is then observed as $170,000. John’s section 199A deduction would then be the lesser of:

A.)  20% of the $100,000 qualified business income, or $20,000, or

B.)   20% of $70,000 of the excess taxable income over the $100,000 net capital gain, or $14,000.

Even within this example there are stipulations that have very specific language that will determine if an ndividual is even eligible for this deduction. In response to this, in August 2018 the IRS released a 184-page guide that explains exactly how the requirements for the 199A deduction will play out in a variety of real ways.

It’s clear that the 199A deduction offers advantageous savings for entrepreneurs young and old. These savings allow you to keep more of your income or reinvest it into improving your business. That is, unless you choose to have your money tied up in a 401(K) or IRA plan. Why not free up your money, maximize your 199A deduction, and empower yourself to fully manage your hard earned income the best way you see fit?

The stakes are high, so if you’re all in, contact us today at Hindsight Financial. We’ll show you simple, effective strategies to play a better game and win consistently.— Your move.

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