The New 20% Business Deduction

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For tax years beginning after 2017, business taxpayers (other than C-Corporations) may be able to take the new Section 199A 20% deduction of their qualified business income. This means that you will only pay tax on 80% of your business income. For service businesses, the deduction begins to phase out as taxable income reaches specific thresholds. For joint filers the threshold is $315,000, and for all other filers, the threshold is $157,500.

Additional limitations apply to non-service businesses owned by joint filers with taxable income between $315,000 and $415,000, with the deduction completely phased out for incomes over $415,000. The same limitations apply to all other filers with taxable income between $157,500 and $207,500, with the deduction similarly phasing out completely above $207,500. There are exceptions for businesses with income over these amounts if they have sufficient assets and employee wages.

These limitations open up many opportunities for tax planning. Taxpayers can massively cut their taxes by deferring income or accelerating income in order to come under these threshold amounts. Depending on your business entity, you may be able to increase your 20% business deduction by increasing W-2 wages before the end of the year.

The rules are very complex and this article is just touching the surface of it. To maximize your Section 199A deduction, review this area carefully with your tax planner.