Understanding Section 199A
PRESENTERS: PHOTO PHOTO Dan Fales Shareholder Tony Schweier Shareholder
Definition of key terms Agenda Who gets the deduction Aggregation election Limitation on the deduction
Definition of Key Terms Section 199A 20% pass-through deduction Granted an individual business owner a deduction equal to 20% of owner s Qualified Business Income (QBI)
Definition of Key Terms Qualified Business Income (QBI) The net amount of qualified items of income, gain, deduction and loss with respect to a qualified trade or business. QBI excludes any item treated as capital gain or loss, dividend income, interest income, gain from foreign currency or commodities transactions, any deduction or loss allocable to non-qualified income.
Definition of Key Terms Qualifying trade or business A venture that rises to a Section 162 trade or business
Definition of Key Terms Safe Harbor for rental activities Test under which rental activities constitute a Section 162 trade or business. 1. Separate books and records are maintained for each rental activity 2. 250 hours or more of rental services are performed per year for the activity (or combined enterprise) 3. Contemporaneous records including time reports are maintained for A) hours of all services performed B) description of services performed C) dates services performed D) who performed the services Note: A taxpayer can t use the Safe Harbor for any property rented on a triple net basis. A taxpayer can still argue that a triple net rental rises to a Section 162 level based on facts and circumstances.
Definition of Key Terms Specified Service Trade or Business AKA SSTBs Trades or businesses in health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, trading, investment management, and a catch all
Definition of Key Terms Unadjusted basis in assets AKA UBIA
Who Gets the Deduction? Test #1 If your taxable income is $315,000 (married filing joint) or less (or less than $157,000 filing single) then you get the 20% 199A deduction on your QBI without any kind of limitation.
Test #2 Who Gets the Deduction? A self rental will be treated as a trade or business if it is rented to a commonly controlled trade or business. Commonly controlled is defined as the same owner or group of owners owning 50% or more of both the property and the business. The 50% standard uses the attribution rules under Sections 707 and 267. One final note the property cannot be leased to a C Corporation.
Who Gets the Deduction? Test #3 If you are a Specified Service Trade or Business (SSTB) you cannot claim the deduction if you are above the taxable income dollar threshold.
Who Gets the Deduction? SSTBs defined as follows: Health Physicians, dentists, veterinarians, other similar healthcare professionals
Who Gets the Deduction? SSTBs defined as follows: Law Lawyers, paralegals, arbitrators and mediators
Who Gets the Deduction? SSTBs defined as follows: Accounting Accountants, enrolled agents, return preparers, bookkeepers. You don t need to be a CPA to be disallowed the deduction.
Who Gets the Deduction? SSTBs defined as follows: Actuarial Science
Who Gets the Deduction? SSTBs defined as follows: Performing arts Actors, singers, directors, entertainers
Who Gets the Deduction? SSTBs defined as follows: Consulting Those who provide professional advice and counsel to clients to assist in achieving goals and solving problems. Specifically includes government lobbyists. Regulations have provided some clarification you are a consultant if you are paid only (our emphasis) for providing advice and counsel. If you only get paid on consummation of the transaction your services were intended to affect you are not a consultant.
Who Gets the Deduction? SSTBs defined as follows: Athletics Includes team owners but not broadcasters
Who Gets the Deduction? SSTBs defined as follows: Financial services Wealth managers, retirement planners, investment bankers
Who Gets the Deduction? SSTBs defined as follows: Brokerage services Stock broker disqualified but real estate and insurance brokers are allowed the deduction.
Who Gets the Deduction? SSTBs defined as follows: Investment management Anyone who receives fees for investing, asset management or investment management services. Exception real estate management
Who Gets the Deduction? SSTBs defined as follows: Trading Anyone who trades in securities, commodities or partnership interests.
Who Gets the Deduction? SSTBs defined as follows: Catch all Any trade or business where the principal asset is the reputation or skill of one or more of its owners or employees. Final regs make it clear that this provision will be very narrowly (our emphasis) interpreted by the IRS.
Who Gets the Deduction? Test #4 The De Minimis exception to the SSTB rules. Sale Exception #1: The business has gross receipts less than $25 million and less than 10% of those gross receipts are attributable to services in a disqualified field.
Who Gets the Deduction? Exception #2: The business has gross receipts greater than $25 million and less than 5% of those gross receipts are attributable to services in a disqualified field.
Who Gets the Deduction? What if you fail the De Minimis exception tests? 1. Maintain separate books and records for each business line (or at least for SSTB and non-sstb business.) 2. If possible have separate employees for each line of business. If this cannot be achieved then likely that the whole business is tainted as an SSTB and no deduction is allowed.
Aggregation Election Commonly controlled, qualifying businesses can elect to be aggregated.
Aggregation Election There are several requirements to be met in order to be eligible to make aggregation election.
Aggregation Election 1. Each business must be a Section 162 trade or business 2. The same person or group of persons must own, directly or indirectly, 50% or more of each business to be aggregated. The attribution rules of IRC 267 and 707 apply. The same people do not need to own an interest in each entity in order to qualify for aggregation. 3. The control test must be met for the majority of the tax year and must include the last day of the tax year. 4. The businesses must share the same tax year. (This requirement would appear to preclude fiscal year S Corporation shareholders from being able to aggregate with calendar year self rental real estate partnerships.) 5. None of the business can be SSTBs.
Aggregation Election 6. Two of the following three factors must be satisfied: 1) Must provide products, services or property that are same or customarily offered together. 2) Share facilities or significant centralized business elements such as personnel, accounting, legal, manufacturing, human resources, IT, etc. 3) Operates in coordination with or reliance upon one or more business in the aggregated group.
Limitation on the Deduction The deduction is limited to the greater of: 1. 50% of taxpayer s share of W-2 wages with respect to the qualified trade or business 2. 25% of the taxpayer s share of W-2 wages with respect to the qualified trade or business plus 2.5% of the taxpayer s share of the unadjusted basis immediately after acquisition of all qualified property (Think Original Cost) also known as UBIA
Is this a Section 162 trade or business? yes Decision Tree No No 199A Deduction Calculate QBI, does You get 20% taxpayer taxable No deduction on income exceed $315,000 MFJ your QBI yes Are any of the trades or No 199A deduction for Yes businesses an SSTB the QBI of the SSTB No Do you have an Calculate No aggregation election deduction to make? yes
Decision Tree Did you aggregate everything? yes No Apply the netting rules for any QBI loss Calculate the deduction Calculate the deduction
Decision Tree Calculate the deduction 50% of your share of W-2 wages paid by the business 25% of your share of W-2 wages paid by the business plus 2.5% of your share of UBIA of qualified property or
THANK YOU Dan Fales Shareholder Tony Schweier Shareholder