Todd bailey irc section 199 a (rev051418)

For Educational Purposes Only. ©2018 Fortress Risk Management, LLC. All Rights ReservedFor Educational Purposes Only. ©2018 Fortress Risk Management, LLC. All Rights Reserved.
2017 Tax Cuts & Jobs Act
IRC § 199A
Todd Bailey JD MAcc
Fortress Risk Management
Colorado Springs, CO
Fortressrisk.com
28

For Educational Purposes Only. ©2018 Fortress Risk Management, LLC. All Rights Reserved
Corporate Changes—Flat 21%
• Beginning 2018, C Corp flat rate of 21%.
• Personal Service Corporations taxed the same as any “C” Corp.
• Corporate AMT eliminated.
29
Stock Ownership 2017 DivRecDed 2018 DivRecDed
<20% 70% 50%
20% to <80% 80% 65%
>80% 100% 100%

Qualified Business Income
(QBI)Deduction
•IRC 199A
•Deduction = 20% of “QBI”
•Generally available to owners of pass-
through businesses
•Limited for Specified Service Businesses
•Limited by the business owner’s taxable
income
30

Eligible Taxpayers
•Owners of:
•S-Corporation (Form 1120S)
•Sole proprietorships (Schedule C)
•Sole owners (or TIC owners) of rental real
estate (Schedule E)
•Partnership (Form 1065)
•Trusts (Form 1041)
•Estates (Form 1041)
31

199A Thresholds
TYPES OF TAXPAYERS THRESHOLD AMOUNT
Married persons $ 315,000
Single persons $ 157,500
Estates $ 157,500
Non-grantor completed gift trusts $ 157,500
Non-grantor incomplete gift trusts $ 157,500
Children subject to the “kiddie tax” $ 157,500
32

Steps in Analysis
•Service or Non-Service
•Married ($315,000) or
• Single ($157,500)—Single includes all files
statuses except MFJ
•Phase-out or Phase-in
•Taxpayer’s share of business QBI
•Overall Limitation
•Planning
33

Four Sec. 199A Classifications--MFJ
+ Limitations
Service Non‐Service
Taxable income less than
• $315,000‐‐MFJ
• $157,500—Single
20% deduction 20% deduction
Taxable income between
• $315,000 and $415,000—MFJ
• $157,500 and $207,500—Single
Deduction
phased‐out
Limitation
phased‐in
Taxable income greater than
• $415,000—MFJ
• $207,500—Single
No Deduction Wage/Capital
Tests

 


Is Taxable
Income >
Threshold?
$315k/$157.5k
Is Taxable
Income over
Full Phase-in?
No Deduction
Yes
Yes
Yes
Service
Business?
Per §§ 1202(e)(3)(A),
475(c)(2), or 475(e)(2)?
Is Taxable
Income >
Threshold?
$315k/$157.5k
Deduction =
QBI x 20%
Deduction
Reduced
Deduction =
QBI x 20%
Is Taxable
Income Over Full
Phase-in?
Limitation
Phased-in
IRC 199A(b)(3)
Deduction = lesser of:
1) QBI x 20% or
2) The greater of:
• W-2 wages x 50% or
• W-2 wages x 25% + 2.5% of
qualified property
Yes
Yes
No
No
No
No
No
Test Qualified
Business
ServiceBusiness
Non-ServiceBusiness

Statute—Deduction Limit
(a)In general.
In the case of a taxpayer other than a corporation, there shall be allowed as a deduction for any taxable year
an amount equal to the sum of—
(1)the lesser of—
(A) the combined qualified business income amount of the taxpayer, or
(B) an amount equal to 20 percent of the excess (if any) of—
(i) the taxable income of the taxpayer for the taxable year, over
(ii)the sum of any net capital gain (as defined in section 1(h)), plus the aggregate amount of the
qualified cooperative dividends, of the taxpayer for the taxable year, plus
(2)the lesser of—
(A) 20 percent of the aggregate amount of the qualified cooperative dividends of the taxpayer for the
taxable year, or
(B) (B) taxable income (reduced by the net capital gain (as so defined)) of the taxpayer for the
taxable year.
The amount determined under the preceding sentence shall not exceed the taxable income (reduced by
the net capital gain (as so defined)) of the taxpayer for the taxable year.
36

Statute--Combined QBI Amount
(b) Combined qualified business income amount.
• For purposes of this section—
(1) In general.
• The term “combined qualified business income amount” means, with  respect to any taxable
year, an amount equal to—
(A)the sum of the amounts determined under paragraph (2) for each qualified trade or
business carried on by the taxpayer, plus
(B)20 percent of the aggregate amount of the qualified REIT  dividends and qualified publicly
traded partnership income of the  taxpayer for the taxable year.
37

Overall 199A Deduction Limit—
Basic
• The deduction also cannot exceed the lesser of
• The “Combined QBI Amount,” or
• 20% x (total taxable income – capital gain)
• Combined QBI amount =
1. Deduction for each qualified trade or business
2. PLUS 20% of REIT dividends and
3. Plus Publicly-traded partnership income
38

Example—Basic
• Alan is a married engineer
• His taxable income is $250,000
• His 199A deduction is $50,000 ($250,000 x 20%)
• The lesser of calculation does not limit his deduction
Deduction cannot exceed the lesser of
1. The Combined QBI Amount:
a. Deduction for each qualified trade or business
b. PLUS 20% of REIT dividends and
c. Plus Publicly-traded partnership income, or
2. 20% x (total taxable income – capital gain)
a. $50,000
b. 0
c. 0, or
39

Example—Basic
• Betty—a married real estate developer
• Business #1 QBI Deduction = $10,000 (20% x $50k)
• Business #2 QBI = $40,000 (20% x $200k)
• Due to tax-losses, her taxable income is only $200,000
• The lesser of calculation limits her deduction to $40,000 [$200,000 x 20% =
$40,000]
a. Deduction for each qualified trade or business
b. PLUS 20% of REIT dividends and
c. Plus Publicly-traded partnership income, or
a. $10,000 + $40,000 = $50,000
b. 0
c. 0, or
2. 20% x $200,000 = $40,000
40

Service
Business?
Per §§ 1202(e)(3)(A),
475(c)(2), or 475(e)(2)?
Is Taxable
Income >
Threshold?
$315k/$157.5k
Deduction =
QBI x 20%
Is Taxable
Income Over Full
Phase-in?
Limitation
Phased-in
IRC 199A(b)(3)
Deduction = lesser of:
1) QBI x 20% or
2) The greater of:
• W-2 wages x 50% or
• W-2 wages x 25% + 2.5% of
qualified property
Yes
Yes
No
No
No
Test Qualified
Business
Non-ServiceBusiness
Deductible for each qualified trade
or business = the lesser of
1) 20% of the taxpayer’s QBI with
respect to the qualified trade or
business, or
2) the greater of—
a) 50% of the W-2 wages with
respect to the qualified trade
or business, or
b) the sum of
a) 25% of the W-2 wages
with respect to the
qualified trade or business,
plus
b) 2.5% of the unadjusted
basis immediately after
acquisition of all qualified
property.

Definitions
• W-2 Wages
• Equal to wage expense [IRC §199A(f)(1)]
• Not guaranteed payments
• Not reasonable shareholder salaries in S Corp
• Not payments to independent contractors
• Qualified Property
• Tangible property being depreciated (e.g. does not include land)
• Depreciation period is the later of the regular depreciation period or 10-years
• Unadjusted Basis
• Equal to basis immediately after acquisition
• Not adjusted for depreciation
• Special considerations for Bonus Depreciation & §179 Expensing
Non-Service
Business
42

Example—Lighting Business
• Travis owns an Events Lighting business and has taxable income of
$500,000
• Business:
• Generates $100,000 of QBI
• Pays W-2 Wages of $50,000
• Has a nominal amount of Qualified Property
• Travis 199A deduction is $20,000 ($100,000 x 20%)
• 199A Deduction is not limited by the wage test ($50,000 x 50% = $25,000)
Deduction equals lesser of:
1) QBI x 20% or
2) The greater of:
a) W-2 wages x 50% or
b) W-2 wages x 25% + 2.5% of qualified property
1) $100,000 x 20% or
2) The greater of:
a) $50,000 wages x 50% or
b) $50,000 wages x 25% + 2.5% of 0
Non-Service
Business
43

Example: 2 Apartment Buildings
• Chelsea owns Apartment Building #1
• Generates $100,000 of QBI for a deduction of $20,000 ($100,000 x
20%)
• Property is not fully depreciated and was purchased for $1,000,000 (less
land)
• No employees
• QBI deduction = $20,000
1) QBI x 20% or
2) The greater of:
1) $100,000 x 20% = $20,000 or
2) The greater of:
a) $0 wages x 50% or
b) $0 wages x 25% + 2.5% x $1M = $25,000
Non-Service
Business
44

Example: 2 Apartment Buildings
• Chelsea owns Apartment Building #2
• Generates $100,000 of QBI for a deduction of $20,000 ($100,000 x
20%)
• Property is not fully depreciated, but was purchased 10-years earlier for
$500,000 (less land)
• No employees
• QBI deduction is limited to $12,500 due to smaller amount of
qualified property
1) QBI x 20% or
2) The greater of:
1) $100,000 x 20% = $20,000 or
2) The greater of:
a) $0 wages x 50% or
b) $0 wages x 25% + 2.5% x $500,000 = $12,500
Non-Service
Business
45

Wages—Example
• Eric and Aubrey have a Parkour YouTube Channel
• Business has no Qualified Property
• Business will have $1M of QBI in 2018
• Eric and Aubrey will have $1M of taxable income
• Q: What if the Business pays a salary?
Sole
Proprietorship
Partnership S‐Corporation
Qualified Business Income $ 1,000,000 $ 1,000,000 $ 700,000
W‐2 Wages $ 0 $0 $ 300,000
QBI Deduction $0 $0 $ 140,000
1) QBI x 20% or
2) The greater of:
a) W-2 wages x 50%
or
b) W-2 wages x 25%
+ 2.5% of qualified
property
46

Service
Business?
Per §§ 1202(e)(3)(A),
475(c)(2), or 475(e)(2)?
Is Taxable
Income >
Threshold?
$315k/$157.5k
Is Taxable
Income over
Full Phase-in?
No Deduction
Deduction =
QBI x 20%
Deduction
Reduced
Yes
Yes
Yes
No
No
Test Qualified
Business
ServiceBusiness
“Service Business” (“specified trade or business)
• health
• law
• accounting
• actuarial sciences
• performing arts
• consulting
• athletics
• financial services
• brokerage services
• principal asset is the reputation or skill of one
or more of its employees or owners, or
• Investing/investment mgmt, trading, or
dealing in securities, pship interests, or
commodities.
• Not: Architects, Engineers

Is Taxable
Income >
Threshold?
$315k/$157.5k
Is Taxable
Income over
Full Phase-in?
No Deduction
Yes
Yes
Yes
Service
Business?
Per §§ 1202(e)(3)(A),
475(c)(2), or 475(e)(2)?
Deduction =
QBI x 20%
Deduction
Reduced
No
No
Test Qualified
Business
ServiceBusiness
“Service Business” (“specified trade or
business)
• health
• law
• accounting
• actuarial sciences
• performing arts
• consulting
• athletics
• financial services
• brokerage services
• principal asset is the reputation or skill
of one or more of its employees or
owners, or
• Investing/investment mgmt, trading,
or dealing in securities, pship interests,
or commodities.
• Not: Architects, Engineers

Example: Phase-out
• Michael is a Marketing Consultant
• His business generates $500k of QBI
• His 199A deduction = $0
• Consulting is a service business
• Phase-out of 199A Deduction
• Begins at $315,000 (MFJ)
• Completely phased-out at $415,000 (MFJ)
Service Business
49

Example: Phase-out
• Natalie and Sara are Dentists
• 50/50 Shareholders in S Corp for Practice
• Practice has QBI of $1M after salaries
• Scenario #1: $500k each of QBI for a deduction of $0
• Scenario #2:
• Add Captive Ins ($300k Prem) + Qualified Plan ($100k Contr)
•  QBI of $600k i.e. $300k each
• Natalie and Sara each have a 199A deduction of $60,000 (20% x $300k)
Service Business
50

51
Service BusinessLeimberg
Calculator
Example

52
Service BusinessLeimberg
Calculator
Example

Non-Service Schd C vs. S Corp
53
Leimberg
Calculator
Example

Disclosures & Limitations
• For informational and educational purposes only.
• Fortress Risk Management, LLC (“FRM”) and its principals and employees do not provide legal, accounting, actuarial, underwriting or
investment services.
• FRM does not determine the amount of premiums. Risks are analyzed and premiums are determined by an independent actuary.
• FRM is not an investment advisor and does not give any advice or recommendations as to securities or investments nor any
evaluation of any investment portfolios you may have.
• Any implementation of FRM recommendations should be made only after consulting with your legal, tax, accounting and risk
management professionals.
• IRS Circular 230 Disclaimer: To ensure compliance with IRS Circular 230, any U.S. federal tax advice provided in this communication
is not intended or written to be used, and it cannot be used by the recipient or any other taxpayer (i) for the purpose of avoiding tax
penalties that may be imposed on the recipient or any other taxpayer, or (ii) in promoting, marketing or recommending to another
party a partnership or other entity, investment plan, arrangement or other transaction addressed herein.
• The Middle Market Risk Management Solution™ is a registered mark of Fortress Risk Management LLC, a Wyoming limited liability
company.
• These materials are copyright protected by Fortress Risk Management, LLC 2014-2017. All Rights Reserved. No part of this material
or any of its contents may be reproduced, copied, modified or adapted, without the prior express written consent of FRM.
54

Todd bailey irc section 199 a (rev051418)

Recommended

Recommended

More Related Content

What's hot

What's hot (18)

Similar to Todd bailey irc section 199 a (rev051418)

Similar to Todd bailey irc section 199 a (rev051418) (20)

Recently uploaded

Recently uploaded (20)

Todd bailey irc section 199 a (rev051418)