In continuation of our last article by Susan K. Voss, CPA, of our Agriculture Team, let’s review another new IRC code section 199A, created in the Tax Cuts and Jobs Act that will impact both the agricultural and commercial industries beginning January 1, 2018 and ending January 1, 2026. The following is a summary of the mechanics of this deduction, which will be an important planning tool in 2018.
Who will be impacted by 199A?
- Farmers filing a schedule F with their individual returns
- Sole proprietors filing Schedule C with their returns
- S Corporations and Partnerships with qualified business income passed-through to their owner’s 1040’s.
There are a few “specified service trades or businesses” that do not qualify when taxable income gets over certain limits. They are those in the field of health, accounting, or law. Also, those that generally receive fees, compensation, or other income for endorsing products or services, using an individual’s image, likeness, name, signature, voice, trademark or other symbols associated with the individual’s identity, or for appearing at an event or on the radio, television, or another media format will not be receiving the 20% deduction.
How will this impact my return?
The best way to explain this is an example using an average married farmer-business-person with taxable income less than the specific break-point of $315,000 for married filing joint taxpayers.
Person A and Person B file a joint return. A operates a farm or a business taxed as a sole proprietorship that earns $68,000 of qualified business income (QBI). B has an off-farm W-2 wage of $44,000. Their standard deduction in 2018 is $24,000. A and B would generally be eligible to a deduction equal to the lesser of 20 percent of the QBI of $68,000, $13,600, or 20% of taxable income which would be $68,000 + $44,000 – $24,000 = $88,000, $17,600. Deduction will be $13,600 from taxable income to save close to $3,000 in income tax. This deduction does not affect self-employment tax.
What is QBI?
Qualified Business Income is the trigger for this 20% deduction. It is income from a business including ordinary gains less ordinary losses and self-rental net income. It is not wages, other forms of compensation including guaranteed payments, nonbusiness interest income, dividends, annuity income, or any item used in determining net long-term capital gain.
Why was this deduction created?
It seems like a windfall for the taxpayers. Part of the Tax Bill was designed to stimulate business in the United States and create jobs. Regular C Corporations were granted a fixed 21% federal income tax rate. This reduced taxes tremendously for large corporations that had been paying as high as 38% tax. The new 199A deduction is a way to also reduce taxes for those who are not C Corporations.
We’re here at TDT CPAs and Advisors to help you understand your planning options. The new tax bill has some potentially positive effects on your return particularly when it comes to the 20% deduction of Qualified Business Income. Give us a call if you have questions about Section 199A. It will be part of the conversations taking place during planning season.
Authors Note: Hope your fall harvest season was safe and productive. Mother Nature has thrown us some curve balls this year that will have to be overcome with good marketing and cost saving strategies.
Thank you to the 150 attendees of our Ag Conference in August. We plan to see many of you soon as the Thanksgiving and Christmas Season approach!
Susan K. Voss, CPA, has over 30 years of public accounting experience, and she specializes in farm operations, agri-business, and individuals and their closely-held businesses.