Article Date:
February 2019

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IRS Section 199A Final Regs Shed New Light on Service Businesses

Remember, new tax code Section 199A offers you a 20 percent tax deduction gift if you have



pass-through business income (such as from a proprietorship, a partnership, or an S corporation) and


2018 taxable income of $315,000 or less (married, filing jointly) or $157,500 or less (filing as single or head of household).


But once your taxable income is greater than the relevant amount above (which Section 199A calls a threshold), your Section 199A tax deduction becomes more complicated.


Under the rules that apply to this new Section 199A tax deduction, the tax code creates two types of businesses:



Business that are in favor and can realize the new deduction regardless of taxable income.


Business that are out of favor. The tax code calls the out-of-favor business a “specified service trade or business.”


If you own an out-of-favor specified service trade or service, you suffer a zero (yep, zero!) Section 199A tax deduction on that business’s out-of-favor income when you have 1040 taxable income greater than $415,000 (married, filing jointly) or $207,500 (single or head of household).


With taxable income greater than the $315,000/$157,500 threshold and less than the $415,000/$207,500 upper limit, Section 199A reduces the tax deduction available to your out-of-favor specified service trade or business.


This brings us to the questions that are answered in this article:



What if your taxable income is above the limit, but your pass-through business has one part that’s out of favor and another part that’s in favor? You will like what the rules have done for you if you are in this situation.


What service business gives the “big picture” of how the out-of-favor specified service trade or business definitions work? Answer: consulting. We will dive in on the rules that apply to consulting because almost any business could have some consulting activity. ... Log in to view full article.

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