Paul L. Caron

Saturday, June 20, 2020

CRS: The Section 199A Deduction — How It Works And Illustrative Examples

Congressional Research Service, The Section 199A Deduction: How It Works and Illustrative Examples (R46402 June 10, 2020):

CRS LogoCongress made numerous changes to the federal tax code for individuals and corporate and noncorporate businesses in December 2017, as part of P.L. 115-97 (referred to in this report as the 2017 tax revision but also known as the Tax Cuts and Jobs Act). At the core of the law was a permanent cut in the corporate income tax rate from a top rate of 35% to a flat rate of 21%.

During the congressional debate over the 2017 tax revision, pass-through business owners sought tax relief comparable to any reduction in corporate tax rates. Heeding this request, Congress added a new deduction under Section 199A of the federal tax code. The deduction allows pass-through business owners to deduct up to 20% of their qualified business income (QBI) in determining their personal tax liability. This reduces effective tax rates for pass-through business profits by up to 20%. Like most of the changes in the individual income tax in P.L. 115-97, the new Section 199A deduction is temporary: it is available from 2018 to 2025.

In general, Section 199A allows individuals, trusts, and estates with pass-through business income to deduct up to 20% of their QBI from their taxable income. (Owners of certain agricultural or horticultural cooperatives, real estate investment trusts, and publicly traded partnerships are also eligible for the deduction, but they are not covered in this report.) A pass-through business owner’s QBI is the net amount of items of income, loss, gain, and deduction for each qualified domestic trade or business he or she owns. If a taxpayer owns more than one business, then QBI must be determined separately for each one and added together to determine the taxpayer’s total QBI in a tax year. ...

This report illustrates how the deduction amount is calculated in various scenarios that illustrate the mechanics of the WQP limitations and the SSTB limitation, and the interaction of these limits when applicable.

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