Questions regarding 199A Rules

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Chi312
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Joined: Sat Oct 13, 2018 10:14 am

Questions regarding 199A Rules

Post by Chi312 » Sat Oct 13, 2018 10:24 am

First off long time lurker this is my first post. Have some questions in regards to 199A

I am in a specialized service business. This was my first year making significant money I am set up as a sole proprietor. No w2 job or wages to myself and no employees. I did run the business for half of last year and filed taxes as sole proprietor. Can I still set up an S Corp or is it too late into the year? Any other suggestions to minimize taxes? I am right around the $207,500 threshold right now. Single un-married. Feels like I am getting killed on taxes.

If I show a net profit of $200,000 how much QBI deduction am I allowed to take?

What if I show a net profit of $220,000 and put $13,000 in a Solo 401k bringing my net income below the threshold down to $207,000?

Any advice appreciated. Thank you

Chi312
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Joined: Sat Oct 13, 2018 10:14 am

Re: Questions regarding 199A Rules

Post by Chi312 » Sat Oct 13, 2018 8:42 pm

I talked to my attorney briefly and he said we could set up the S Corp and that we can get extensions to make it valid for 2018.

I am still very confused with the 199A rules though. If I come in between $157,500 and $207,500 net income as a specialized service business with no w2 do I still get any 199a deduction?

Thank you

Spirit Rider
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Re: Questions regarding 199A Rules

Post by Spirit Rider » Sat Oct 13, 2018 10:56 pm

The Section 199A QBI deduction threshold is based on your taxable income. Your actual QBI would be the lesser of your net self-employment earnings (bussiness - 1/2 SE tax) and your taxable Income.

For example, with a net profit of $200K, your net self-employment earnings would be $189,361. With $8K Self-employed health insurance deduction, $12K standard deduction and $11,861 in a one-participant 401k contribution. Not counting any other income or adjustments, your taxable income would be $157,500 x 20% = $31,500 QBI deduction.

An S-Corp is likely to result in higher taxes not lower. While you might save $3K -$4K in FICA taxes, your QBI deduction may be about $10K lower

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FiveK
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Re: Questions regarding 199A Rules

Post by FiveK » Sat Oct 13, 2018 11:55 pm

Chi312 wrote:
Sat Oct 13, 2018 8:42 pm
I am still very confused with the 199A rules though. If I come in between $157,500 and $207,500 net income as a specialized service business with no w2 do I still get any 199a deduction?
Yes, that income range is a phase-out and not a cliff.

You can enter your numbers in the personal finance toolbox spreadsheet and it will do those calculations.

Chi312
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Joined: Sat Oct 13, 2018 10:14 am

Re: Questions regarding 199A Rules

Post by Chi312 » Sun Oct 14, 2018 12:34 pm

Appreciate the answers. I also found out that being a Realtor is actually excluded from Specialized Service Business. Thanks NAR!

That is very helpful with the phase in example for $200,000. The more I research I do not think S Corp makes the most sense right now.

What I am still a bit confused with is if I come out at $220,000 net income with no w2 is that still a partial deduction not cliff? Or would I definitely want to do a Solo 401k, etc. to shelter some income and keep it under $207,500?

Thanks

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FiveK
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Re: Questions regarding 199A Rules

Post by FiveK » Sun Oct 14, 2018 12:44 pm

Chi312 wrote:
Sun Oct 14, 2018 12:34 pm
What I am still a bit confused with is if I come out at $220,000 net income with no w2 is that still a partial deduction not cliff? Or would I definitely want to do a Solo 401k, etc. to shelter some income and keep it under $207,500?
Depends on what you mean by "net income". If that is your Schedule C net income, you will get ~$1.9K 199A deduction.

If that is your taxable income (after subtracting 1/2 SE tax and $12K standard deduction) you will get no 199A deduction.

Have you tried the spreadsheet suggested earlier?

BusterMcTaco
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Re: Questions regarding 199A Rules

Post by BusterMcTaco » Sat Nov 24, 2018 12:25 pm

There are multiple threads about 199A but this title seems like a pretty good catch-all, so I'll tag on another question.

I'm a complicated scenario this year (which seems to be my catch phrase nowadays). I have about $200k in taxable income (2018 1040 line 7 minus line 8). This would limit my 199A deduction to roughly $40k. My QBI is about $350k.

My wife is also getting access to a trust fund that was set up for her many decades ago. It seems like we will have to declare the realized gains on the trust's trades this year (of which there are plenty, as you might imagine, given that it's been under the control of an investment "advisor"). It also has about $27k in unrealized gains (as of a few statements ago, anyway). I had a thought to just sell everything and move to my normal asset allocation, and use the capital gains to increase my taxable income. Of course, then I realized that the taxable income limitation is for taxable income not including items of capital gain or loss. I don't have any capital losses I can use to offset the full amount of gains (my TLH earlier this year only yielded about $3k loss). So selling for the purpose of 199A seems like it won't help.

Further, and this is my question, it seems that if capital gains put me over the threshold amount of $315k (MFJ), that it would significantly hurt me, as the threshold is simply taxable income, and not taxable income above any capital gains/losses, is this correct? So if I had $165k of capital gains, not only would I still be limited to 20% of $200k, but then I would further lose 50% of my deduction*, making it only 10% of $200k. Does this sound correct?

*I'm not a specified service industry

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FiveK
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Re: Questions regarding 199A Rules

Post by FiveK » Sat Nov 24, 2018 1:03 pm

BusterMcTaco wrote:
Sat Nov 24, 2018 12:25 pm
Further, and this is my question, it seems that if capital gains put me over the threshold amount of $315k (MFJ), that it would significantly hurt me, as the threshold is simply taxable income, and not taxable income above any capital gains/losses, is this correct? So if I had $165k of capital gains, not only would I still be limited to 20% of $200k, but then I would further lose 50% of my deduction*, making it only 10% of $200k. Does this sound correct?

*I'm not a specified service industry
Assuming (because you are not a specified service industry) that you are a qualified business, it appears (based on the spreadsheet tool mentioned previously) that your marginal rate on capital gains jumps to ~35% when capital gains put you over the threshold amount of $315k.

At least, that's why I see when entering numbers given and guessing at those not given. Probably worth your time to enter your actual numbers (if the spreadsheet can handle all the nuances), and/or use real tax software to check.

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