Section 199A Specified Service Business Comparison Part 2

By Jason Watson, CPA
Posted Wednesday, October 20, 2021

Big shot surgeon compared to the lowly goat herder (non-specified service trade).

		Surgeon			Goat Herder
ln		No S	S Corp		No S	S Corp
1	Business Income	600,000	600,000		600,000	600,000
2	less W-2 Wages inc. SEHI, HSA, etc.	0	210,000		0	210,000
3	less Payroll Taxes	0	11,024		0	11,024
4	Net Business Income Section 199A	600,000	378,976		600,000	378,976
5	Adjustments to 1040 / NBI
6	less Social Security Tax	7,979	0		7,979	0
7	less Medicare Tax	8,034	0		8,034	0
8	less SEHI, HSA, etc.	0	0		0	0
9	Other Taxable Income	0	0		0	0
10	Adjusted Gross Income*	583,986	588,976		583,986	588,976
11	Itemized / Std Deductions	50,000	50,000		50,000	50,000
12	Taxable Income Before Section 199A	533,986	538,976		533,986	538,976
13	Section 199A Net Biz Income	120,000	75,795		120,000	75,795
14	Section 199A W-2 Wage Limit	0	105,000		0	105,000
15	Section 199A Taxable Income Limit	106,797	107,795		106,797	107,795
16	Section 199A Benefit	0	0		0	75,795
17	Marginal Income Tax Rate	37%	37%		37%	37%
18	Income Tax Benefit from Section 199A	0	0		0	-28,044
19	plus Self-Employment Tax	32,028	0		32,028	0
20	plus Tax on Line 12 Delta (above)	0	1,846		0	1,846
21	plus Payroll Tax	0	22,049		0	22,049
22	Net Tax After Section 199A Benefit	32,028	23,895		32,028	-4,149
23	Net S Corp Benefit $		8,133			36,177

*includes the S Corp W-2

There are several notables, takeaways and explanations-

Well, that’s a lie. There are only two. First, specified service trades or businesses got hosed in the Section 199A calculation. Being a goat herder raking in $600,000 as compared to a surgeon gets a $36,000 bump in tax benefit. If you give it careful consideration, how are these two businesses different? While we are being a bit facetious here, at the same time two business owners are experiencing different tax worlds based on titles. The goat herder could be operating with a staff and not relying his or her reputation or skill.

Second takeaway, although specified service industries such as accountants, doctors, attorneys, etc., are not enjoying the Section 199A deduction benefit, it still pays to be an S corporation. There is still a savings of $8,133 by being an S Corp for the big shot surgeon. You have an obligation as a citizen to reduce your taxes to the minimum allowed.

Please review our previous chapter for more information and expanded definitions of specified service trade or business.