Take Advantage of the 199A 20% Deduction

September 25, 2018

For certain taxpayers, the ability to deduct up to 20% of income from a domestic trade or business operated as a sole proprietorship or through a partnership, S corporation, trust or estate may be limited or eliminated by their taxable income. If the business income is generated from a Specified Services Trade or Business as defined by the Code and Proposed Regulations, no Section 199A deduction is available to taxpayers with income greater than $415,000 for joint filers and $207,500 for single filers. For taxpayers who file jointly, the deduction is fully available if their taxable income is $315,000 or less ($157,500 or less for single filers). The Section 199A deduction is subject to phase out in between these income levels. In general, a Specified Services Trade or Business includes service-related businesses, for example the fields of health, consulting, financial services, brokerage services, and investment advice, among others.

Increasing Retirement Savings

If your income is above these levels, increasing your deductible expenses through increased retirement savings can have multiple benefits; allowing you to take advantage of the 20% deduction that might not otherwise be available, lowering one’s taxes and increasing one’s retirement savings.

Maximum annual deductible retirement contributions depend on the retirement plan that is adopted, with the best plan for you dependent on the maximum annual contribution you can afford, your age and the ages and years of service of your employees. Discrimination rules for retirement savings require that contributions or benefits not discriminate in favor of highly compensated employees, although there are numerous ways you can satisfy this requirement.  Without employees in your trade, business, or a related trade of business, discrimination rules are not a concern.

How Much to Contribute

Maximum annual deductible retirement plan contributions range from $12,500 ($15,500 for individuals over age 50) at the low end of plans to many hundreds of thousands of dollars at the top end of plans.

  • The smallest maximum deductible contribution limit is available through a SIMPLE retirement plan — a plan that is relatively simple to set up and administer, but has limited flexibility.
  • The most common type of retirement savings plan, a defined contribution plan (e.g., a SEP, 401(k) plan, profit sharing plan), allows for contributions of up to $55,000 per individual ($61,000 for individuals over age 50).
  • The largest deductions are usually possible through a defined benefit plan; a plan which funds a specified retirement benefit for the employee for life. An actuary is required to determine the amount of the required minimum contribution and the maximum allowable contribution to a defined benefit plan. These amounts are based on the benefit provided by the plan, the worker’s age and expected plan earnings.
  • A retirement savings strategy that combines defined contribution plans (401(k), profit sharing) with a defined benefit plan can maximize the annual deductions for a business and its key owners/employees.

To take advantage of these deductions, there are time limits for setting up new plans for 2018. SIMPLE retirement plans and safe harbor 401(k) plans for employers with employees must be adopted by October 1. Other defined contribution and defined benefit plans must be adopted by December 31. SEPs, which are not available to all taxpayers, may be adopted after year end.

To know which plan is the most appropriate plan for your business, provides the best current tax deduction, and has the fewest restrictions and required contributions for employees, please give us a call. Deb Walker, National Director, Compensation and Benefits, Kyle Frigon with Cherry Bekaert Benefits Consulting, Susan Tucker, Director of Qualified Plan Administration and your Cherry Bekaert tax professionals look forward to working with you.