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Section 199A Specified Service Business Comparison Part 1
Table Of Contents
By Jason Watson, CPA
Posted Wednesday, October 20, 2021
Same online retailer but compared to an attorney (SSTB). Yuck!
| Retailer | Attorney | |||||
| ln | No S | S Corp | No S | S Corp | ||
| 1 | Business Income | 250,000 | 250,000 | 250,000 | 250,000 | |
| 2 | less W-2 Wages inc. SEHI, HSA, etc. | 0 | 87,500 | 0 | 87,500 | |
| 3 | less Payroll Taxes | 0 | 6,694 | 0 | 6,694 | |
| 4 | Net Business Income Section 199A | 250,000 | 155,806 | 250,000 | 155,806 | |
| 5 | Adjustments to 1040 / NBI | |||||
| 6 | less Social Security Tax | 7,979 | 0 | 7,979 | 0 | |
| 7 | less Medicare Tax | 3,348 | 0 | 3,348 | 0 | |
| 8 | less SEHI, HSA, etc. | 0 | 0 | 0 | 0 | |
| 9 | Other Taxable Income | 0 | 0 | 0 | 0 | |
| 10 | Adjusted Gross Income* | 238,673 | 243,306 | 238,673 | 243,306 | |
| 11 | Itemized / Std Deductions | 12,000 | 12,000 | 12,000 | 12,000 | |
| 12 | Taxable Income Before Section 199A | 226,673 | 231,306 | 226,673 | 231,306 | |
| 13 | Section 199A Net Biz Income | 50,000 | 31,161 | 50,000 | 31,161 | |
| 14 | Section 199A W-2 Wage Limit | 0 | 43,750 | 0 | 43,750 | |
| 15 | Section 199A Taxable Income Limit | 45,335 | 46,261 | 45,335 | 46,261 | |
| 16 | Section 199A Benefit | 0 | 31,161 | 0 | 0 | |
| 17 | Marginal Income Tax Rate | 35% | 35% | 35% | 35% | |
| 18 | Income Tax Benefit from Section 199A | 0 | -10,906 | 0 | 0 | |
| 19 | plus Self-Employment Tax | 22,654 | 0 | 22,654 | 0 | |
| 20 | plus Tax on Line 12 Delta (above) | 0 | 1,622 | 0 | 1,622 | |
| 21 | plus Payroll Tax | 0 | 13,388 | 0 | 13,388 | |
| 22 | Net Tax After Section 199A Benefit | 22,654 | 4,103 | 22,654 | 15,009 | |
| 23 | Net S Corp Benefit $ | 18,551 | 7,645 | |||
*includes the S Corp W-2
There are several notables, takeaways and explanations-
Assumptions are $250,000 in business income prior to $87,500 in reasonable shareholder salary. Itemized deductions of $12,000 and both taxpayers are single. Same as previous example, but now we are comparing a non-specified service trade or business (online retailer) to an attorney.
Observe the differences in Line 16. Recall the Section 199A decision tree from earlier-
- If taxable income is less than $157,500 (single) / $315,000 (married) then the 20% deduction for your pass-through entity is fully available. In other words, your taxable income does not exceed the 24% marginal tax bracket.
- If taxable income is greater than $157,500 / $315,000 but less than $207,500 / $415,000 then a partial deduction is available. The phase-in of the limit is linear (more explanation later).
- If taxable income is greater than $207,500 / $415,000 then you are hosed. Sorry.
The attorney should absolutely be an S corporation and enjoy the $7,645 in tax savings. He or she simply won’t be enjoying the $18,551 savings of the online retailer. Surely the online retailer should be sued by the attorney to help equalize the balance of tax benefits and preserve the natural order. Attorneys are so proud. Same with doctors. Same with CPAs. Perhaps that we are all SSTBs. Our pride killed our deduction.
Remember that if a specified service trade or business has taxable income that is equal to or less than $157,500 for single taxpayers and $315,000 for married taxpayers, there is no phase-in of the limitations (or Section 199A phaseout). Said in another way, if the online retailer and the attorney both earned $150,000 from their respective crafts, the Section 199A savings would be identical.
Drive that point home please; an SSTB in the 24% marginal tax rate is the same as a non SSTB.
Let’s do one more! Drool… come on, it’s not that bad. No, Jason, really, it is that bad. For real.
Jason Watson, CPA, is a Partner and the CEO of WCG CPAs & Advisors, a boutique yet progressive tax, accounting and business consultation firm located in Colorado serving small business owners and taxpayers worldwide.
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