Service Professionals Don’t Always Lose Out on the 199A Deduction

June 18, 2019

By Eduard Suleymanov, CPA

There was a lot of talk this past tax filing season about the new Section 199A deduction, introduced in the Tax Cuts and Jobs Act of 2017. A big part of the conversation was who exactly is eligible for this tax benefit – and just how much they can save.

Pursuant to IRC Section 199A, owners of pass-thru business entities (e.g. sole proprietors, partners in partnerships, and S corporation shareholders) are entitled to a deduction equal to 20% of the qualified business income earned in that qualified trade or business.

Sounds great, right? Not so fast. There are many taxpayers who cannot just reduce their qualified business income by 20% and call it a day.  When the taxpayer's taxable income is above specified thresholds, the deduction has various limitations, which effectively reduces the deduction below 20 percent.

In addition, some industries don't even qualify for the deduction. Service professionals such as doctors, lawyers, accountants and such are deemed to have earned their income in a non-qualified trade or business (a "specified service trade or business") and don't qualify for any portion of the deduction – at least, at first glance.

I am in a specified service trade or business. How can I get the full 20% deduction?

What many people don’t realize is that all owners of pass-thru entities with qualified business income can take a full 20 percent deduction of that income if the taxable income on their personal tax returns is below the following threshold amounts: $157,500 for single taxpayer or $315,000 for married taxpayers.

If taxable income is below the amounts listed above, a full 20% deduction is allowed against any qualified business income without limitations, even for business owners in the service industires. 

Single taxpayers with taxable income between $157,500 and $217,500 and married taxpayers with taxable incomes between $315,000 and $415,000 are still allowed the deduction (even if in a service industry); however, the deduction begins to phase-out and will become subject to the various section 199A limitations over the threshold amounts ($215,500 for single and $415,000 for married).

Maximizing the 199A deduction

Reducing taxable income can result in large tax savings for section 199A purposes. Owners of pass-through business entities whose income is over the threshold amounts should consider deferring taxable income and reducing taxable income. Consideration should be given to pension deduction opportunities to help reduce taxable income. In addition, certain taxpayers may want to consider their filing status. In some cases, taxpayers who previously filed their tax returns as married filing separately may benefit from filing jointly due to the larger phase-out thresholds offered by Section 199A.

Consult your Marks Paneth tax advisor for more information.