Section 199A Proposed Regulations

September 27, 2018

You be aware that new Internal Revenue Code section 199A gives a 20% tax break for many pass-through entities, like partnerships, S corporations and sole proprietorships. Proposed regulations came out a few weeks ago that help us better understand this complex provision.  
The deduction is generally taken at the individual level.  The 20% deduction is the smaller of your “qualified business income” or taxable income.  There are certain service businesses that cannot take the deduction, like lawyers and accountants.  But ….. that rule does not apply if your taxable income is under the threshold amount.  For 2018 (it is subject to inflation adjustment), the threshold amount is $157,500 for singles and married filing separately, and $315,000 for married filing jointly.  Under those amounts, it doesn’t matter what your business is and you are not subject to other limitations that come into play for those above the threshold amount.  You don’t fall off a cliff if you are one dollar over the threshold amounts.  There is a phase-in range - $50,000 (to $207,500) for singles and married filing separately and $100,000 (to $415,000) for married filing jointly.  
What if you do exceed the threshold amount and in fact are over the phase-in range?  Then there are some statutory limitations apply to you.  First, you must figure out if you are a service trade or business that is excluded under the statute or regulations.  If you are, no deduction for you.  If you are not a specified service trade or business, then your deduction may be limited by wages the business pays or property that the business owns. 
These regulations are complicated with many variables and special rules.  If you have any questions about the SALT deductions or the 20% tax break under the revised tax code or any other taxation questions, please contact Scott Novak at (973) 228-9900, ext. 215.