Section 199A Frequently Asked Questions

Section 199A Frequently Asked Questions

By: Jason Watson / Posted Saturday, October 13, 2018
Posted By: Jason Watson

Key Takeaways

  • The Section 199A deduction from the 2017 Tax Cuts and Jobs Act provides a tax break for business owners, including S Corps, partnerships, sole proprietors, and rental property owners.
  • The deduction is taken on the owner’s individual tax return, not the business return.
  • LLC formation is not required to qualify for Section 199A.
  • Rental property owners can claim the deduction if they meet the IRS Notice 2019-7 safe harbor rules.
  • Certain professions are labeled Specified Service Trades or Businesses (SSTBs), which may limit or phase out the deduction at higher income levels.
  • SSTB designation is determined at the entity level, affecting all owners regardless of individual contributions.
  • Income thresholds matter: $157,500 for singles and $315,000 for married filing jointly; above these, SSTB deductions phase out.
  • Married filing separately does not bypass SSTB limits, and community property rules may apply.
  • WCG provides guides, PDFs, and resources to help small business owners understand and optimize Section 199A deductions.

The Tax Cuts and Jobs Act of 2017 created a new tax deduction for business owners (and others) called the Section 199A Qualified Business Income Deduction. Later in August 2018, the IRS released Proposed Regulations 1.199A to offer some additional insight to Section 199A. However, some of it reads well and some of it doesn’t, and we continue to field questions from clients and other small business owners all the time. As such we created a blog post titled Section 199A Frequently Asked Questions.

Before we get into Section 199A questions and answers, here are some additional resources for your review-

Section 199A Deduction General

Find helpful insights, summaries, and resources to understand this important tax benefit.

Section 199A and S Corps

Learn about the Section 199A Qualified Business Income Deduction, a key tax benefit.

Section 199A and Rentals

Learn about Section 199A’s 20% deduction for small business owners and rental income.

Do I have to create an LLC to get the Section 199A deduction?

No. It is available to sole proprietors (no entity formation), rental property owners (as far as we know and the proposed regulations do not state otherwise), S corporation shareholders and partnerships (multi-member LLCs, LLPs, and all the other goofy variants). Having an LLC is a good idea for other reasons, but the Section 199A deduction is not one of them.

Is the Section 199A deduction a business deduction?

No. It is a deduction taken on the owner’s individual tax return on page 2 of Form 1040 on line 9. Don’t look at your 2017 tax returns for line 9… the IRS decided to chop up Form 1040 into multiple parts and relabeled them Schedules for the sake of everyone’s desire to have a postcard tax return. No one seems to complain about state tax returns which can easily exceed 3 pages (California).

Back to the IRS and Form 1040 being chopped up… For example, Schedule 1 is titled Additional Income and Adjustments to Income which is essentially page 1 of old school Form 1040. Here is a draft Form 1040 with the numbered schedules. As of October 13, 2018, the IRS was still tinkering with these. These numbered schedules plus the traditional lettered ones (A, B, C, D, E, F, etc.) is absolutely silly… have a 3 page Form 1040 with lettered schedules as necessary. Much simpler, yet we digress.

Is the Section 199A deduction available to rental property owners?

Yes, but there are rules outlined in IRS Notice 2019-7 including Section 199A safe harbor requirements. You should also read our blog post specifically on the Section 199A rental property rules and analysis.

Section 199A Final Regs Quickie

Read more about Section 199A regulations and rental property provisions in IRS Notice 2019-7.

Section 199A Final Regs Deep Dive

Read our condensed 70-page Section 199A guide for small business owners in just one hour.

Section 199A Final Regs PDF

Learn about the IRS definition of trade or business and Section 199A with our accessible PDF.

Why did they make the Section 199A deduction on the individual tax return of the owner?

Simple. The way Section 199A is written, there are limitations based on household income so it would be difficult for the business entity tax return to have visibility into each owners’ individual tax situation (not to mention privacy concerns).

What is the specified service trade or business nonsense I hear about?

Section 199A defines certain professions where the deduction is limited when certain income thresholds are exceeded. The list is health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, investing services and securities trading services. Plus any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners.

I am a CRNA operating an S Corp. Am I considered a specified service trade or business?

Yes. The Proposed Regulations 1.199A expanded definitions of SSTBs. Specifically for health, the regs state that anyone who provides medical services is considered a specified service trade or business. This means that nurses, nurse anesthetists, chiropractors, physical therapists, massage therapists, etc.

Law includes attorneys, paralegals, mediators and arbiters. Accounting includes CPAs, Enrolled Agents, bookkeepers, tax professionals, financial auditors, etc. Credentials do not make or break this definition.

Where is the specified service trade or business determined?

SSTB is determined at the entity level. So, if an entity is designated a specified service trade or business, all owners are subject to this possible limitation regardless of their individual title or contribution to the business. For example, let’s say Fred Flintstone and Mr. Slate are owners together. And Mr. Slate’s reputation or skill is known all over the world and it is the primary catalyst for the success of the business. Fred will also be deemed an owner of a specified service trade and business, and could further be limited on his Section 199A deduction. Guilty by association.

If the business is deemed to be a SSTB, do I lose my Section 199A deduction?

Maybe. Perhaps. You might. Yes and No. This is one of the biggest confusions out there. If you are a married doctor making $300,000 as a household you do not lose your Section 199A deduction, but if you make $500,000 you do. Read that again. Being labeled as a specified service trade or business isn’t bad until you meet income thresholds, which are $157,500 for singles and $315,000 for married filing joint. These numbers represent the end of the 24% marginal tax bracket, and the next tax bracket is 32%. This means the 32%, 35% and 37% represent the wealthier taxpayers and as such the Section 199A deduction becomes limited.

What if I file married filing separately? Can I get around the SSTB limitations?

Nice try. The IRS is smart. Congress is smart. The Joint Committee on Taxation is smart. Stop laughing… really, they are! And they saw you coming a mile a way… probably heard you too. All kidding aside, the tax code is very, very careful to prevent simple tax arbitrage based on tax filing status. If you are married filing separately, your $315,000 becomes $157,500 anyway. And… if you are in a community property state it might not make a difference since the K-1 will be the tax document coded with the specified service trade or business designation and splitting your income 50-50 (like in California) doesn’t appear to help.

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Here is our summary of the major issues recently updated by the final regulations, rental property safe harbor (Notice 2019-7) and how all this crud affects S corporations-

Section 199A Final Regs Quickie

Read more about Section 199A regulations and rental property provisions in IRS Notice 2019-7.

Section 199A Final Regs Deep Dive

Read our condensed 70-page Section 199A guide for small business owners in just one hour.

Section 199A and Rentals

Learn about Section 199A’s 20% deduction for small business owners and rental income.

Section 199A Deduction General

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Section 199A and S Corps

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Section 199A Final Regs PDF

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Frequently Asked Questions

Who qualifies for the Section 199A deduction?

S Corporations, partnerships, LLCs, sole proprietors, and qualifying rental property owners.

Do I need an LLC to get the deduction?

No, it is available to multiple business structures, not just LLCs.

Where is the deduction claimed?

On the owner’s individual tax return (Form 1040).

What is a Specified Service Trade or Business (SSTB)?

Certain professions like health, law, accounting, consulting, athletics, and others where deduction limits apply above income thresholds.

How are SSTB limits applied?

Based on household income: $157,500 for singles, $315,000 for married filing jointly.

Does being an SSTB mean I lose my deduction?

Not automatically; limits apply only if income exceeds threshold amounts.

Can married couples file separately to avoid limits?

No, the IRS and tax rules prevent this workaround.

Can rental property owners claim Section 199A?

Yes, if they meet IRS safe harbor requirements for trade or business status.

Where can I learn more about Section 199A rules?

WCG provides guides, PDFs, and blog posts summarizing regulations and safe harbor rules.

Does SSTB status affect all owners of a business?

Yes, designation is at the entity level, so all owners may be impacted.

Getting Started with WCG CPAs & Advisors

Want to talk to us about tax return preparation, tax planning and strategy, and all the other things that go with it? We are eager to assist! The button below takes you to our Getting Started webpage, but if you want to talk first, please give us a call at 719-387-9800 or schedule an discovery meeting.

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Jason Watson, CPA is a Partner and the CEO of WCG CPAs & Advisors, a boutique consultation and tax preparation CPA firm serving clients nationwide with 7 partners and over 90 tax and accounting professionals specializing in small business owners and real estate investors located in Colorado Springs.

He is the author of Taxpayer’s Comprehensive Guide on LLC’s and S Corps and I Just Got a Rental, What Do I Do? which are available online and from mostly average retailers.

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