Section 199A Deduction for Pass-Through Entities
What is the Section 199A Deduction?
If you’re an owner of a pass-through business entity, then you may be eligible to receive a tax deduction from your qualified business income (“QBI”).
Introduced by the Tax Cuts and Jobs Act of 2017, Section 199A permits pass-through entities (e.g., sole proprietors, partners in partnerships, and S corporation shareholders) to deduct up to 20% of their QBI, plus 20% of qualified REIT dividends and 20% of qualified PTP income, if applicable. The Section 199A deduction is available for tax years beginning after December 31, 2017, and before January 1, 2026.
For additional savings, if you’re eligible to claim the full 20% deduction on QBI, you may be able to reduce your effective tax rate down to 29.6% from the maximum effective rate of 37%.
IRS Requirements
According to the Internal Revenue Service (“IRS”), businesses that qualify for the deduction are likely to experience an average annual burden between 30 minutes and 20 hours to meet compliance:
- Totaling 25 million hours annually at a project cost over 10 years to exceed $1.3 billion
- Burden for most taxpayers is projected to range from 30 minutes to 2.5 hours
- Individual situations will vary based on facts, circumstances, and complexity and could significantly exceed the aforementioned range
Qualifying for the Section 199A Deduction
Any trade or business can qualify for the deduction, unless your trade or business meets the definition of a specified service trade or business (“SSTB”):
- Health
- Law
- Accounting
- Actuarial Science
- Performing Arts
- Brokerage Services
- Consulting
- Athletics
- Financial Services
- Investing and investment management
- Trading
- Dealing in securities, partnership interests, or commodities
- Trade or business where the principal asset is the reputation or skill of one or more of its employees or owners
How Can Cherry Bekaert Help?
Cherry Bekaert’s tax professionals are here to help you make sense of the Section 199A deduction. We can provide guidance with:
- Identifying your qualified trade or businesses
- Determining your SSTB
- Calculating your Section 199A deduction under both the aggregate and non-aggregate method
- Preparing deliverable supporting results
- Restructuring to maximize your deduction
- Reviewing special rules that certain entities, including trusts and estates, must adhere to
- Legislations and Pronouncements
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Frequently Asked Questions
Section 199A Frequently Asked Questions
Q: What is the § 199A deduction?
Effective for tax years beginning after December 31, 2017 and before January 1, 2026, a taxpayer other than a corporation is entitled to a deduction equal to 20% of the taxpayer’s “qualified business income” earned in a “qualified trade or business.”
Q: Who can claim the deduction?
The § 199A deduction is available to any taxpayer “other than a corporation,” this includes Individual owners of sole proprietorships, rental properties, S corporations, or partnerships.
Q: How much is the deduction?
Subject to certain other limitations, each individual pass-through business owner may be able to claim the § 199A deduction for the lesser of: (i) 20% of the combined qualified business income (“QBI”) from the individual’s trades or businesses, plus 20% of the individual’s combined qualified REIT dividends and qualified Publicly Traded Partnership (“PTP”) income; or (ii) 20% of the amount by which the individual’s taxable income exceeds the individual’s net capital gain.
For a complete list of frequently asked questions, visit the resources tab below.
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Research and Reports
- Section 199A: Detailed New Proposed Regulations and Their Impacts on Government Contractors
- 2018 Tax Reform Highlights for Technology, Health and Life Sciences, Manufacturing and Distribution
- Top Ways Tax Reform Affects Individuals, Estates and Trusts
- Take Advantage of the 199A 20% Deduction
- Section 199A: Detailed New Proposed Regulations
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Cherry Bekaert Resources
Tools
- Do you qualify for the 199A deduction? Flow Chart downloadable pdf
- 199A Deduction Frequently Asked Questions downloadable pdf
