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Archive for Pass-Through Business Deduction

How High-Income Professionals Can Benefit From The Pass-through Deduction

Charles Woodson - Pass-through Deductions

If you are a high-income professional who is excluded from the new pass-through deduction because you are in a specified service trade or business (SSTB), you may be able to use retirement plan contributions as a work-around so that you can benefit from that new 20% deduction.

An SSTB generally includes the following trades or businesses:

  • Health (services by physicians, nurses, dentists, veterinarians, and other similar health care providers, although this does not apply to spas and health clubs)
  • Law
  • Accounting
  • Actuarial science
  • Performing arts (but this does not apply to the services of others in the industry, such as promoters and broadcasters);
  • Consulting
  • Athletics
  • Financial services

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How Some High-Income Taxpayers Can Maximize The New 20% Pass-through Business Deduction

Charles Woodson, Tax Advisor

Taxpayers with higher 1040 taxable incomes who are self-employed but are not “specified service businesses” may find it beneficial to structure new businesses, or restructure an existing business, as an S corporation to avoid taxable income limitations that apply to the new 20% Sec. 199A pass-through deduction.

To make up for the tax reform’s reduction of the C corporation tax rate to 21%, from which other forms of business activities do not benefit, Congress created a new deduction and code section: 199A. The 199A deduction is for taxpayers with other business activities – such as sole proprietorships, rentals, partnerships and S corporations – since, unlike C corporations, which are directly taxed on their profits, the income from the other business activities flows through to the owner’s tax return and is taxed at the individual level, i.e., at the individual’s tax rate, which can be as high as 37%.

This new Sec. 199A deduction is 20% of the pass-through income from these business activities. But not every owner of these flow-through businesses will benefit from this deduction because, as in all things tax, there are limitations.

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