Understanding The 20 Percent Pass-Thru Tax Deduction: Section 199A

Congress recently passed the Tax Cuts and Jobs Act of 2017. Within this tax law is a new Internal Revenue Code (IRC) provision, Section 199A, which provides a potential 20 percent tax deduction for individuals with income related to pass-through entities. This is a remarkable tax break for small businesses, the best we have seen in the last 50 years.

To ensure you are gaining the full benefits of this new deduction, you must first learn how it works. Here are a few essential things to know about Section 199A:

What are "pass-through entities"?

The deduction was created for pass-through entities; these include sole proprietors, partnerships, real estate investors, S-corporations, LLCs, REITs and other qualified cooperatives. These can also include trusts and estates.

Unfortunately, the deduction does not apply to traditional corporations, traditionally known as C-corporations.

When does this IRC provision/new deduction take effect?

Application for the pass-through income deduction will be available for tax years starting January 1, 2018. It is important to note that, unless extended in the future, this pass-through income deduction is not permanent and will only be available for eight years. As it stands, the deduction is scheduled to end December 31, 2025.

How does the 20 percent income deduction work?

Section 199A is a deduction that conditionally equals percent of a pass-through entity's business taxable income. We say "conditionally" because the law has some limitations attached.

What do these limitations include?

Some limitations may determine whether you will qualify for the deduction and for what amount. As a taxpayer, your taxable income is subject to ordinary income tax rates. The Section 199A deduction is limited to no more than 20 percent of that taxable income.

How much can you save?

The amount you will save in taxes is equal to your Section 199A deduction times your top tax rate.

Does this tax provision apply to foreign businesses and real estate?

No, this new pass-through income deduction only applies to businesses operated and real estate owned and located in the United States.

Does Your Business Qualify For The 20 Percent Deduction?

To meet the requirements for the pass-through income deduction, you must own an interest in a "qualified trade or business," that produces "qualified business income." This does not include "specified service trades and businesses," such as most white collar professions (medical, accounting, law, actuarial science, consulting and financial services).

As with any new tax law, there are many caveats you should not overlook. If you are unclear where your entity stands and want to make sure that you are maximizing every financial opportunity available, enlist the help of Robert L. Bolick, an experienced asset protection attorney.

For more than 30 years, Robert L. Bolick has helped countless clients develop financial plans strategically aligned to fit their unique needs. Mr. Bolick represents clients in Las Vegas and throughout Nevada.

Are You Taking Full Advantage Of This Tax Break?

This is a tremendous opportunity for tax savings. If it applies to you or your business, why not take full advantage of it?

Schedule a free consultation with a friendly, trusted asset protection lawyer today. Contact Robert L. Bolick, Ltd., at 702-690-9090.