Large Capital Gain can Ruin Your Section 199A Deduction

October 5th, 2018 at 7:40 AM

05 Oct Large Capital Gain can Ruin Your Section 199A Deduction

Posted at 11:40h Business Deductions by MF

I have had a number of clients who have been confused about the starting point for the new Section 199A tax deduction.

Let me clarify: taxable income is the sole starting point for your Section 199A deduction.

When your taxable income is equal to or less than the threshold of $157,500 (single) or $315,000 (married, filing jointly), your 199A deduction is the lesser of

20 percent of your taxable income reduced by net capital gains, or
20 percent of your qualified business income plus 20 percent of your combined REIT dividends and qualified publicly traded partnership income.

You are in the wage and/or wage and property phase-in range when your taxable income is above the threshold of $157,500 (single) or $315,000 (married, filing jointly) but equal to or below $207,500 (single) or $415,000 (married, filing jointly).

If your taxable income is higher than $207,500 (single) or $415,000 (married, filing jointly), pay attention to the following:

If you are in an out-of-favor specified service business, your Section 199A deduction is zero.
If you are in an in-favor business, you need wages and/or wages and property to qualify for any Section 199A deduction.

Note how taxable income creates the trigger point in every case described above. For Section 199A, taxable income is just that—taxable income. It’s adjusted for nothing.

Mark S. Fineberg, CPA