Qualified Business Deduction Under New § 199A

The tax bill formerly known as the Tax Cuts and Jobs Acts adds new Section 199A, the Qualified Business Deduction. Here is what you need to know.

Who Qualifies for the new Section 199A Qualified Business Deduction?

Any taxpayer (other than a corporation) that is engaged in a qualified trade or business qualifies for the deduction.

What is a Qualified Trade or Business?

Any business other than a specified service business or the trade or business of performing services as an employee.

What is a Specified Service Business?

Any of the following:

  • A business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, and brokerage services
  • Any business where the principal asset of the business is the reputation or skill of one or more of its employees or owners
  • A business that involves the performance of investment and investment management services, trading or dealing in securities (stock, publicly traded partnership interest, bonds, notional principal contracts, derivatives, and hedges other than regulated futures contracts, foreign currency contracts, nonequity options, dealer equity options, and dealer securities futures contracts), partnership interests, or actively traded commodities (including notional principal contracts, hedges, options, forward contracts, futures contracts, short positions, and similar instruments with respect to an actively traded commodities)

Is There a way to Qualify for the Deduction, even if the Taxpayer’s Business is a Specified Service Business?

 If the taxpayer’s specified service business is one of the following:

  • A business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, and brokerage services
  • Any business where the principal asset of the business is the reputation or skill of one or more of its employees or owners

and the taxpayer’s taxable income is no more than $207,500 (for a single taxpayer) or $415,000 (for a joint taxpayer), then the taxpayer can still qualify for the deduction.  These numbers will be adjusted each year for inflation.

Things That Are Not Clear in the New Statute

It is unclear whether the taxpayer’s taxable income refers to the taxpayer’s taxable income from all sources or just income from all qualified trades or businesses.  My best guess is that it refers to all sources.

It is unclear how Section 199A will apply to tiered partnerships.  The statutory language says that the IRS will develop rules for application to tiered entities.

For more on the Tax Cuts and Jobs Act, click here.

Source: Tax Cuts and Jobs Act, pp. 23 – 46; Joint Explanatory Statement of the Committee of Conference, p. 20 – 40 (pdf)

Posted by Teresa Rankin Klenk, JD, LLM

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