If at all possible, you want to qualify for the 20 percent tax deduction offered by new tax code Section 199A to proprietorships, partnerships, and S corporations (pass-through entities).
If you own one business, you can run into some complications qualifying for the Section 199A deduction.
Basic Rules—Below the Threshold
If your taxable income is equal to or below the threshold of $315,000 (married, filing jointly) or $157,500 (single), follow the three steps below to determine your Section 199A tax deduction with multiple businesses or activities.
Step 1. Determine your qualified business income 20 percent deduction amount for each trade or business separately.
Step 2. Add together the amounts from Step 1, and also add 20 percent of:
This is your “combined qualified business income amount.”
Step 3. Your Section 199A deduction is the lesser of:
Above the Threshold—Aggregation Not Elected
If you do not elect aggregation and you have taxable income above $207,500 (or $415,000 on a joint return), you apply the following additions to the above rules:
The wage and property limitations work like this: for each business, you find the lesser of:
If You Are in the Phase-In/Phase-Out Zone
If you have taxable income between $157,500 and $207,500 (or $315,000 and $415,000 joint), then apply the phase-in protocol.
If You Have Losses
If one of your businesses has negative qualified business income (a loss) in a tax year, then you allocate that negative qualified business income pro rata to the other businesses with positive qualified business income. You allocate the loss only. You do not allocate wages and property amounts from the business with the loss to the other trades or businesses.
If your overall qualified business income for the tax year is negative, your Section 199A deduction is zero for the year. In this situation, you carry forward the negative amount to the next tax year.
Aggregation of Businesses—Qualification
The Section 199A regulations allow you to aggregate businesses so that you have only one Section 199A calculation using the combined qualified business income, wage, and qualified property amounts.
To aggregate businesses for Section 199A purposes, you must show that:
As you can see, with multiple businesses you have much to consider. If you would like our 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.
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