2020 Last-Minute Section 199A Tax Reduction Strategies
As a Business Owner, U.S. Tax Deductions are always welcome. But remember, deductions aren’t static. Allowable U.S. Tax Deductions change over time, and some go away, or, in the case of the Section 199A Deduction, new deductions are added. 1
The Tax Cuts and Jobs Act (TCJA) that was signed into law in December 2017 was part of a major tax reform that paved the way for the Section 199A Deduction. This part of the tax reform could result in big tax savings for small businesses and real estate investors.
Major elements of the ACT include reducing tax rates for businesses and individuals, increasing the standard deduction and family tax credits, eliminating personal exemptions and making it less beneficial to itemize deductions, limiting deductions for state and local income taxes and property taxes. 2
With all that’s happened in 2020, it’s easy to forget about your Section 199A deduction. The following are some of what we would encourage you to consider in your “Last-Minute” Year-End Tax Planning.
For example, with a defined qualified business income of $100,000 and defined taxable, the income of $100,000, you qualify for a $20,000 Section 199A Deduction that you claim on your Form 1040.
One thing to be aware of is that Tax Planning that reduces your business income can also reduce your Section 199A Deduction. For example, you buy $540,000 worth of equipment and expense it. NOW, your qualified business income is $60,000 ($100,000 – $40,000) and your 199A Deduction is $12,000 ($60,000 x 20 percent).
Planning for Section 199A Deductions requires more attention if your qualified business income is more than $163,300 (or $326,600 on a joint return).
In this article, we bring you three Section 199A Strategies you can implement before December 31, 2020, that can help you obtain your best deduction.
First Things First
If your taxable income is above $163,300 (or $326,600 on a joint return), then your type of business, wages paid, and property can reduce and/or eliminate your Section 199A tax deduction.
If your deduction amount is less than 20 percent of your qualified business income (QBI), then consider using one or more of the strategies described below to increase your Section 199A deduction.
Strategy 1: Harvest Capital Losses
Capital gains add to your taxable income, this is the income that
- Determines your eligibility for the Section 199A tax deduction,
- Sets the upper limit (ceiling) on the amount of your Section 199A tax deduction, and
- Establishes when you need wages and or property to obtain your maximum deductions.
If the capital gains are hurting your Section 199A Deduction, you have time before the end of the year to harvest capital losses to offset those harmful gains.
Strategy 2: Make Charitable Contributions
Since the Section 199A Deduction uses taxable income for its thresholds, you can use itemized deductions to reduce and/or eliminate threshold problems and increase your Section 199A Deduction.
Charitable contribution deductions are the easiest way to increase your itemized deductions before the end of the year (assuming you already itemize).
Strategy 3: Buy Business Assets
Thanks to 100 percent bonus depreciation and Section 179 expensing, you can write off the entire cost of most assets you buy and place in service before December 31, 2020.
This can help your Section 199A Deduction in two ways:
- The big asset purchase and write-off can reduce your taxable income and increase your Section 199A deduction when it can get your taxable income under the threshold.
- The big asset purchase and write-off can contribute to an increased Section 199A deduction if your Section 199A deduction currently uses the calculation that includes the 2.5 percent of unadjusted basis in your business’s qualified property. In this scenario, your asset purchases increase your qualified property, which in turn increases the deduction you already depend on.
We are here to help. Please contact us at Morris + D’Angelo to discuss how to maximize your unique circumstances.
Parts of this article are published with permission from Bradford Tax Institute, © 2020 Daniel Morris, Morris + D’Angelo
Steven Geller provides and integrates high-level tax planning, international compliance, and consulting solutions. He leads the firm’s practice areas surrounding Estate and Trust, Real Estate including pre/post-development structuring, Tax-Deferred Exchanges, and Multi-Generational Transfers.
If you would like Steven to speak to you or your Professional Group and bring clarity about the new developments in your Professional arena, please contact us.
Morris+D’Angelo is the industry leader for many High-Wealth Customers and Organizations.
408.292.2892 – San Jose Office
503.749.6300 – Portland Office
310.907.1548 – Los Angeles