Frequently Asked Questions:
Q: In what years is a 199A pass-through deduction available?
A: The pass-through deduction is available for taxable years beginning after December 31, 2017 and under current law will not be available for taxable years beginning after December 31, 2025.
Q: Should the analyzers be used to fill out a client’s tax forms?
A: No. Tax return preparers should calculate each client’s numbers independent of the tools.
Q: Does the 199A deduction apply to other taxes in addition to income taxes?
A: No. The 199A deduction is only allowed for income tax purposes.
Q: What are the threshold amounts at which point the 199A deduction starts to phase-out and/or the 50% of W-2 Wages limitation or the 25% of W-2 Wages plus 2.5% of Qualified Property Unadjusted Basis limitation apply?
A: For 2018, the threshold amounts are $315,000 for married filing joint taxpayers and $157,500 for all other taxpayers. For 2019, the threshold amounts are $321,400 for married filing joint taxpayers and $160,700 for all other taxpayers.
Q: How does the 199A deduction calculation work when a client is within the phase-out range (e.g., 2018 taxable income between $315,000 and $415,000 for married filing joint taxpayers or 2018 taxable income between $157,500 and $207,500 for other taxpayers)?
A: If the W-2 wages / qualified property unadjusted basis tests result in a lower amount than 20% of qualified business income, then a pro-rata amount, based on the phase-out range, of the excess of 20% of qualified business income over the W-2 wages / qualified property unadjusted basis tests reduces the 20% of qualified business income that is deductible. If the W-2 wages / qualified property unadjusted basis tests do not result in a lower amount than 20% of qualified business income, then the calculation is based on the lesser of 20% of qualified business income or the W-2 wages / qualified property unadjusted basis test amounts.
Q: What is a specified service trade or business?
A: A specified service trade or business is defined as any business that has income from the following 11 activities: 1) Health; 2) Law; 3) Accounting; 4) Actuarial science; 5) Performing arts; 6) Consulting; 7) Athletics; 8) Financial services; 9) Brokerage services; 10) Any trade or business where the principal asset is the reputation or skill of one or more employees; or 11) Any trade or business which involves the performance of services that consist of investing and investment management, trading, or dealing in securities, partnership interests, or commodities. For a specified service business, once taxable income reaches $415,000 for married filing joint taxpayers and $207,500 for all other taxpayers, no 199A deduction is allowed.
Q: What is a Qualified REIT Dividend?
A: The term qualified REIT dividend means any dividend from a real estate investment trust received during the taxable year which-
(A) is not a capital gain dividend, as defined in section 857(b)(3), and
(B) is not qualified dividend income, as defined in section 1(h)(11).
Q: What is Qualified Publicly Traded Partnership Income?
A: The term qualified publicly traded partnership income means, with respect to any qualified trade or business of a taxpayer, the sum of-
(A) the net amount of such taxpayer's allocable share of each qualified item of income, gain, deduction, and loss (as defined in subsection (c)(3) and determined after the application of subsection (c)(4)) from a publicly traded partnership (as defined in section 7704(a)) which is not treated as a corporation under section 7704(c), plus
(B) any gain recognized by such taxpayer upon disposition of its interest in such partnership to the extent such gain is treated as an amount realized from the sale or exchange of property other than a capital asset under section 751(a).
Q: Why are there separate entries for Qualified Publicly Traded Partnership Income and Qualified Publicly Traded Partnership Income from a Specified Service Trade or Business?
A: Final Treasury Regulation 1.199A-1(d)(3)(ii) states that the SSTB phase-out (i.e., when taxable income exceeds the threshold) applies to qualified PTP income generated by an SSTB. There are separate entries so that the SSTB phase-out will only be applied to qualified PTP income generated by an SSTB. Final Treasury Regulation 1.199A-6(c)(1) states that a PTP must determine if any trades or businesses it is engaged in directly is an SSTB and report this to its partners.
Q: On the C Corp vs. Pass-Through Deduction Analyzer, I’m confused about what to enter for “gross profits.” Where can I find that?
A: If your client is a sole proprietor, you can find number that on line 5 of the Schedule C. If you client is a partner in a partnership, go to line 3 of your client’s Form 1065 and enter your client’s pro-rata share of the partnership’s gross profits in the box. If you client is a shareholder in an S corporation, go to line 3 of your client’s Form 1120S and enter your client’s pro-rata share of the S corporation’s gross profits in the box. Gross profit for a C corporation can be found on line 3 of Form 1120.
Q: Does the 199A deduction apply to businesses owned by non-grantor trusts and estates?
A: Yes. IRC 199A(f)(1)(B) states “Rules similar to the rules under section 199(d)(1)(B)(i) (as in effect on December 1, 2017) for the apportionment of W-2 wages shall apply to the apportionment of W-2 wages and the apportionment of unadjusted basis immediately after acquisition of qualified property under this section.”
Q: What are wages for 199A purposes?
A: The term "W-2 wages" means, with respect to any person for any taxable year of
such person, the amounts described in paragraphs (3) and (8) of section 6051(a) paid by such person with respect to employment of employees by such person during the calendar year ending during such taxable year. Reasonable W-2 wages paid to shareholder-employees of S corporations is included in W-2 wages. Guaranteed payments to partners of a partnership are not W-2 wages. Sole proprietors are not paid W-2 wages from their own sole proprietorship.
Q: What is Qualified Property for 199A purposes?
A: The term "qualified property" means, with respect to any qualified trade or business for a taxable year, tangible property of a character subject to the allowance for depreciation under section 167 -
(i) which is held by, and available for use in, the qualified trade or business at the close of the taxable year,
(ii) which is used at any point during the taxable year in the production of qualified business income, and
(iii) the depreciable period for which has not ended before the close of the taxable year.
The term "depreciable period" means, with respect to qualified property of a
taxpayer, the period beginning on the date the property was first placed in service by the taxpayer and ending on the later of-
(i) the date that is 10 years after such date, or
(ii) the last day of the last full year in the applicable recovery period that would apply to the property under section 168 (determined without regard to subsection (g) thereof).
Q: What is the 199A Deduction for Income Attributable to Domestic Production Activities of Specified Agricultural or Horticultural Cooperatives?
A: Under IRC 199A(g), specified agricultural and horticultural cooperatives may claim a deduction that is very similar to the “old” IRC 199 deduction, which was repealed under the TCJA. “Specified agricultural or horticultural cooperatives’ are organizations to which part I of subchapter T applies and which are engaged (i) in the manufacturing, production, growth, or extraction in whole or significant part of any agricultural or horticultural product, or (ii) in the marketing of agricultural or horticultural products. Generally, these cooperatives can claim a deduction equal to 9% of their qualified production activities income, subject to limitations. For oil related qualified production activities income, there is generally a 3% reduction of the deduction. Also, the cooperative’s patrons who receive qualified payments from the cooperative may claim a deduction equal to the portion of the deduction allowed to the cooperative which is allowed with respect to the portion of the qualified production activities income to which such payment is attributable and identified by the cooperative in a written notice mailed to the patron; the patron’s deduction cannot exceed the patron’s taxable income after taking into account any deduction under IRC 199A(a) (i.e., the 20% pass-thru deduction).
Q: What is a Cooperative's Domestic Production Gross Receipts (DPGR)?
A: Generally, the term ‘domestic production gross receipts’ means the gross receipts of the taxpayer which are derived from any lease, rental, license, sale, exchange, or other disposition of any agricultural or horticultural product which was manufactured, produced, grown, or extracted by the taxpayer in whole or significant part within the United States. Such term shall not include gross receipts of the taxpayer which are derived from the lease, rental, license, sale, exchange, or other disposition of land.
Q: What is a Cooperative's Taxable Income Computed?
A: See IRC 1382 for taxable income of cooperatives. The taxable income of a specified agricultural or horticultural cooperative shall be computed without regard to any deduction allowable under subsection (b) or (c) of section 1382 (relating to patronage dividends, per-unit retain allocations, and nonpatronage distributions).
Q: What is a Cooperative has Oil Related Qualified Production Activities Income?
A: The term ‘oil related qualified production activities income’ means for any taxable year the qualified production activities income which is attributable to the production, refining, processing, transportation, or distribution of oil, gas, or any primary product thereof (within the meaning of section 927(a)(2)(C), as in effect before its repeal) during such taxable year.
Q: What if the qualified trade or business has income from cooperatives?
A: In the case of any qualified trade or business of a patron of a specified agricultural or horticultural cooperative, the qualified business income with respect to such trade or business shall be reduced by the lesser of-
(A) 9 percent of so much of the qualified business income with respect to such trade or business as is properly allocable to qualified payments received from such cooperative, or
(B) 50 percent of so much of the W-2 wages with respect to such trade or business as are so allocable.