New IRS Sec 199A deduction for tax year 2018 small business. A simplified version of the deduction is 20% of your taxable income but it's a very complicated computation to get the deduction amount. But it's important for all Single Member LLC, Partnerships, and S Corp to know about the deduction. Here is some temporary information for you:
V. Impact of the Tax Cuts and Jobs Act of 2017
The Tax Cuts and Jobs Act (TCJA) replaced the domestic productions activity deduction (DPAD) of §199
with a new pass-through deduction, §199A. The impact of §199A should be considered in tax planning for
continuing operations and sales of a business. Section 199A also affects entity choice, both for new
entities and for existing entities.
The Tax Cuts and Jobs Act (TCJA) replaced the domestic productions activity deduction (DPAD) of §199
with a new pass-through deduction, §199A. The impact of §199A should be considered in tax planning for
continuing operations and sales of a business. Section 199A also affects entity choice, both for new
entities and for existing entities.
A. The pass-through deduction (§199A)
1. Overview of §199A
a. The percentage: As a general rule, the deduction is equal to 20 percent of “qualified
business income,” subject to limitations.
b. Qualified Business Income (QBI): “QBI” is an acronym with which we will become as
familiar in the future as we have been with DPAD. The starting point of the §199A
deduction is to multiply the QBI of each qualified trade or business by 20 percent. So,
what is QBI?
(i) Qualified business income is defined by TCJA as the net amount of qualified
items of income, gain, deduction, and loss with respect to any qualified trade or
business of the taxpayer to the extent such items are --
• Effectively connected with the conduct of a trade or business within the
United States (within the meaning of §864(c), determined by substituting“qualified trade or business (within the meaning of §199A)” for
“nonresident alien individual or a foreign corporation” or for “a foreign
corporation” each place it appears); and
• Included or allowed in determining taxable income for the taxable year.144
For example, if the taxpayer purchases a depreciable asset during the year, the
QBI will be reduced by depreciation allowed during the year, not the purchase
price. Only income effectively connected to the United States under the
provisions of §864(c) is included. Income from sources within Puerto Rico counts
if the income is subject to the United States marginal tax rates.
(ii) Qualified business income does not include specific investment items.
Specifically, QBI excludes:
• Any item of short-term capital gain, short-term capital loss, long-term
capital gain, or long-term capital loss.
• Dividends, income equivalent to a dividend, or payments in lieu of
dividends.
• Interest income other than that which is properly allocable to a trade or
business.
• Excess gain over loss from commodities transactions not pertaining to a
trade or business.
• Excess of foreign currency gains over losses from §988 transactions not
directly related to the needs of the business.
• Net income from notional principal contracts other than clearly identified
hedging transactions that are treated as ordinary.
• Any amount received from an annuity that is not used in the trade or
business of the business activity.
• Qualified REIT distributions, qualified cooperative distributions, and
qualified publicly traded partnership income. They are included in the
calculation of the deduction, but not as part of qualified business
income.
1. Overview of §199A
a. The percentage: As a general rule, the deduction is equal to 20 percent of “qualified
business income,” subject to limitations.
b. Qualified Business Income (QBI): “QBI” is an acronym with which we will become as
familiar in the future as we have been with DPAD. The starting point of the §199A
deduction is to multiply the QBI of each qualified trade or business by 20 percent. So,
what is QBI?
(i) Qualified business income is defined by TCJA as the net amount of qualified
items of income, gain, deduction, and loss with respect to any qualified trade or
business of the taxpayer to the extent such items are --
• Effectively connected with the conduct of a trade or business within the
United States (within the meaning of §864(c), determined by substituting“qualified trade or business (within the meaning of §199A)” for
“nonresident alien individual or a foreign corporation” or for “a foreign
corporation” each place it appears); and
• Included or allowed in determining taxable income for the taxable year.144
For example, if the taxpayer purchases a depreciable asset during the year, the
QBI will be reduced by depreciation allowed during the year, not the purchase
price. Only income effectively connected to the United States under the
provisions of §864(c) is included. Income from sources within Puerto Rico counts
if the income is subject to the United States marginal tax rates.
(ii) Qualified business income does not include specific investment items.
Specifically, QBI excludes:
• Any item of short-term capital gain, short-term capital loss, long-term
capital gain, or long-term capital loss.
• Dividends, income equivalent to a dividend, or payments in lieu of
dividends.
• Interest income other than that which is properly allocable to a trade or
business.
• Excess gain over loss from commodities transactions not pertaining to a
trade or business.
• Excess of foreign currency gains over losses from §988 transactions not
directly related to the needs of the business.
• Net income from notional principal contracts other than clearly identified
hedging transactions that are treated as ordinary.
• Any amount received from an annuity that is not used in the trade or
business of the business activity.
• Qualified REIT distributions, qualified cooperative distributions, and
qualified publicly traded partnership income. They are included in the
calculation of the deduction, but not as part of qualified business
income.
