While year’s end is still the ideal time for tax planning for small business owners, there is still time to minimize your 2022 taxes. If you have still not filed your 2022 tax return, you can still maximize your Section 199A tax deductions for Qualified Business Income (QBI).
The IRS Section 199A The Section 199A deduction is afforded to pass-through companies (sole proprietorships, partnerships, S-Corporations).
The deduction is a tax break for business owners, letting you deduct up to 20 percent of your qualified business income. This deduction was introduced by the Tax Cuts and Jobs Act of 2017 (TCJA) and reduces taxes owed on your business’s profits.
This deduction, also known as the pass-through tax deduction or small business tax cut, applies to most businesses except for C corporations.
Note that The Build Back Better Act proposes to add a fixed-dollar limitation, not indexed for inflation, on the maximum amount of the deduction for tax years beginning after December 31, 2021. The amount proposed is to not exceed $500,000 for a joint return or surviving spouse, $250,000 for a married individual filing a separate return, $400,000 for certain other taxpayers, and only $10,000 for a trust.
Present law phaseouts of the deduction above the threshold amount would continue to apply. Still, while the Build Back Better legislation proposes to make the excess business loss limitation permanent, it does not propose to permanently extend the 199A qualified business income deduction, which is still slated for termination for taxable years beginning after December 31, 2025.
How Does This Deduction Apply To Me?
To claim the deduction on line 9 of Schedule 1 (Form 1040). You must also complete and attach Form 4684, Casualties and Thefts, to your tax return.
If you operate a business as a sole proprietor, you can use Worksheet 1-1 in the instructions for Form 1040 to figure out your QBI deduction.
Use Worksheet 2-2 in the instructions for Form 1040 to see if you’re liable for any limitations on your QBI deduction based on taxable income.
What is the deduction time frame for section 199A?
If you’re in the business of selling books, oil and gas, or other types of goods or services that qualify for the Section 199A deduction, you can claim from 2019 through 2025.
Is there a limit on the Section 199A deduction?
A qualified trade or business income is deductible in an unlimited amount. The threshold levels for 2021 taxes are $329,800 on a married filing jointly return or $164,925 for a married filing separately return, or $164,900 for all other returns. The deduction begins to phase out at 1% for every dollar above these amounts. The phaseout is completed once income exceeds $429,800 on a joint return and $214,900 for all other returns.
The deduction may be limited if you have wages or capital investments in excess of 20% of your taxable income after deducting net capital gains. The following are examples of what can reduce the deduction:
• Wages paid by your business will reduce the amount that can be deducted based on 20% of taxable income
• Capital investments will reduce the amount that can be deducted based on 20% of taxable income. Depreciation and amortization do not count as wages or capital investment with regard to this limitation and therefore do not reduce your qualified business deduction under section 199A.
Where do I find my W-2 wages and unadjusted basis in qualifying property?
You can find your W-2 wages and unadjusted basis in qualifying property on several documents.
• Your W-2 form
• Your tax return
• The books and records of your business
• Your business balance sheet
• Your business tax return
At Estess CPAs, we believe information and planning enhance success. Specializing in small business solutions, we believe the key to successfully managing any business starts with well-informed accounting and payroll systems. Accurate and timely data empowers companies to analyze and react to upcoming needs and changes. Our professionals are experts at keeping accounting systems and payroll processes running smoothly.
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Estess & Company, LLC
Certified Public Accountants
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Luling, LA 70070