Starting now, this year (2018), you have to consider your Section 199A deduction in your year-end tax planning. If you don’t, you could end up with a big fat $0 for your deduction amount.
If your taxable income is above $157,500 (or $315,000 on a joint return), then your type of business, wages paid, and property can reduce and/or eliminate your Section 199A tax deduction.
Strategy 1: Harvest Capital Losses
Capital gains add to your taxable income, and taxable income is the income that:
- determines your eligibility for the Section 199A tax deduction,
- sets the upper limit (ceiling) on the amount of your Section 199A tax deduction, and
- establishes the thresholds above which you need wages and/or property to obtain your maximum deductions.
If the capital gains are hurting your Section 199A deduction, you have time before the end of the year to harvest capital losses to offset those harmful gains.
Strategy 2: Make Charitable Contributions
Since the Section 199A deduction uses taxable income for its thresholds, you can use itemized deductions to reduce and/or eliminate threshold problems and increase your Section 199A deduction.
Charitable contribution deductions are the easiest way to increase your itemized deductions before the end of the year.
Consider doing one or both of the following:
- Donate appreciated stock.
- Prepay (before December 31) your planned 2019 charitable contributions so you can claim them as deductions this year.
Strategy 3: Make Retirement Contributions
Any retirement contributions you make directly reduce your taxable income—and you still have the money inside the retirement account, growing free of taxes until you take it out of the account.
If you are a sole proprietor, your retirement contributions don’t reduce your qualified business income (QBI). Therefore, as long as your QBI is the basis for your Section 199A deduction, you can put away as much as you want using a traditional IRA, SIMPLE IRA, SEP-IRA, or individual 401(k) without damaging your Section 199A deduction.
If you are an S corporation owner, your retirement strategy can achieve the same result as the proprietor’s by using an employee salary or wage contribution to the retirement plan and no contribution by the S corporation.
Strategy 4: Buy Business Assets
Thanks to 100 percent bonus depreciation and Section 179 expensing, you can write off the entire cost of most assets you buy and place in service before December 31, 2018.
This can help your Section 199A deduction in two ways:
- The big asset purchase and write-off can reduce your taxable income and increase your Section 199A deduction when it can get your taxable income under the threshold.
- The big asset purchase and write-off can contribute to an increased Section 199A deduction if your Section 199A deduction currently uses the calculation that includes the 2.5 percent of unadjusted basis in your business’s qualified property (UBIA). In this scenario, your asset purchases increase your UBIA, which in turn increases the deduction you already depend on.
You can run your numbers so that you can see what your Section 199A deduction looks like with and without the application of a strategy. If you would like assistance with this, please do not hesitate to reach out to your team at Luster Tax Consulting to work through this with you. Please use the following link to book your complimentary strategy call with your team at Luster Tax Consulting.