Tax Cuts & Jobs Act

The Act – §199A Page 112

Pass Through Business Income

• Example – Combined income and carryover
loss

• Sean and Jessi’s 2018 c/o loss <$50,000>

• Sean’s 2019 Sch C income $150,000

• Jessi’s 2019 K-1 loss is <$40,000>

• Deduction

– Sean ($150,000 x 20%) $ 30,000

– Jessi ($40,000 loss x 20%) ($ 8,000)

– 2018 carryover ($50,000 loss x 20%) ($10,000)

– 2019 Net $ 12,000

Copyright 2018 Jennings Advisory Group LLC 117

The Act – §199A Page 113

Pass Through Business Inc. –S 1/4

• “High” income taxpayers have two
additional limitations to take into account

1. Wage and capital limitation
2. Specified service trade or business limitation

• Note that neither limitation applies if
taxable income is less than the thresholds
(next slide)

Copyright 2018 Jennings Advisory Group LLC 118

199

The Act – §199A Page 113

Pass Through Business Inc. S 2/4

• Both limitations begin once a taxpayer’s
taxable income (not AGI) exceeds

– $315,000 for MFJ filers

– $157,500 for all others

• Both limitations are fully phased in once a
taxpayer’s taxable income reaches

1. $415,000 for MFJ filers (phase in range is
$100,000)

2. $207,500 all others (phase in range is
$50,000)

Copyright 2018 Jennings Advisory Group LLC 119

The Act – §199A Page 113
Pass Through Business Inc. S3/4

• Wage and Capital limitation is the greater of

1. 50% of wages paid in qualified trades or
businesses, or

2. The sum of

• 25% of wages paid in qualified trades or
businesses, plus

• 2.5% of unadjusted basis in qualified property

– Qualified property is depreciable property used in
qualified trade or business still in use at year end for
which the later of the depreciable period or 10 years has
not ended

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200

The Act – §199A Page 113

Pass Through Business Inc. S 4/4

• Wages defined

– Wages paid in respect to qualified trade or
business

• Subject to withholding, plus
• Elective deferrals

– That are reported the Social Security
Administration within 60 days of when due

• NOTE – wages paid to related parties
qualify

Copyright 2018 Jennings Advisory Group LLC 121

The Act – §199A Page 114

Pass Through Business Inc –S1/2

• Example – Ed’s taxable income > $207,500

– Qualified business profit $250,000
– Qualified payroll $120,000

– Qualified equipment basis $350,000

• Calculation

a. 20% of business income $50,000
b. 50% of wages $60,000

c. 25% of wages plus 2.5% of basis $38,750

d. Greater of b. or c. $60,000

• Lesser of a. or d. $ 50,000

Copyright 2018 Jennings Advisory Group LLC 122

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The Act – §199A Page 114

Pass Through Business Inc. – S2/2

• Example 2 – Ed’s taxable income > $207,500

– Qualified business profit $250,000

– Qualified payroll $0

– Qualified equipment basis $100,000

• Calculation

a. 20% of business income $50,000

b. 50% of wages $0

c. 25% of wages plus 2.5% of basis $ 2,500

d. Greater of b. or c. $ 2,500

• Lesser of a. or d. $ 2,500

• Planning idea – how about an S corporation?

Copyright 2018 Jennings Advisory Group LLC 123

The Act – §199A Page 115

Pass Through Business Inc – S 1/2

• Example 3 – Dave’s taxable income > $207,500

– Qualified business profit $350,000

– Qualified payroll $0

– Apartment complex depreciable basis $6,500,000

• Calculation

a. 20% of business income $ 70,000

b. 50% of wages $0

c. 25% of wages plus 2.5% of basis $162,500

d. Greater of b. or c. $162,500

• Lesser of a. or d. $70,000

Copyright 2018 Jennings Advisory Group LLC 124

202

The Act – §199A Page 115

Pass Through Business Inc. S2/2

• Wage limit is phased in for taxpayers between the
minimum and maximum taxable income
thresholds

• Issue is if taxable income is

– Less than the threshold, deduct 20% of profit

– More than the maximum threshold, deduct lesser of
20% of profit or 50% of wages (or the wage plus
capital limit)

– But what if in between two thresholds

• See formula on page 115

• Easier to understand formula when demonstrated
with example – see page 116

Copyright 2018 Jennings Advisory Group LLC 125

The Act – §199A Page 116

Pass Through Business Inc -S 1/2

• Example – non service business

• MFJ return taxable income $350,000: more
than $315,000, but less than $415,000

– Kathy’s business profit $75,000 (20% = $15,000)

– Kathy paid wages of $20,000 (50% = $10,000)

– Difference between the two limits $5,000

• Limitation calculation

a. Taxable income in excess of threshold $ 35,000

b. Excess income as a % of phaseout 35%

c. Reduction ($15,000 - $10,000) x 35% $ 1,750

d. Net §199A deduction $ 13,250

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203

The Act – §199A Page 116

Pass Through Business Inc – S2/2

• Example – non service business

• Josh’s taxable income $187,500, more than
$157,500, but less than $207,500

– Josh’s business profit $125,000 (20% = $25,000)
– Josh’s share of $90,000 wages (50% = $45,000)

• Limitation calculation – no calculation is
required as the wage limit is greater than
the calculated deduction

Copyright 2018 Jennings Advisory Group LLC 127

The Act – §199A Page 117

Pass Through Business Inc – S 1/5

• Taxpayers in “specified service
businesses” whose taxable income

– Is below the minimum threshold amounts
($315,000 for MFJ, $157,500 for all others) MAY
claim the full §199A deduction

– Is above the maximum threshold amounts
($415,000 for MFJ, $207,500 for all others) MAY
NOT claim any §199A deduction

– Is in between the minimum and maximum
threshold amounts may claim a partial §199A
deduction

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204

The Act – §199A Page 117

Pass Through Business Inc S 2/5

• Specified service business limitation applies
to those in services businesses, including

– Health
– Law
– Consulting
– Accounting
– Performing arts
– Actuarial
– Athletics
– Financial services and brokerage
– Any other trade or business where the owner or

employee reputation or skill is the principal asset

Copyright 2018 Jennings Advisory Group LLC 129

The Act – §199A Page 117

Pass Through Business Inc - S 3/5

• But, the definition specifically excludes
•

– Architects
– Engineers

Copyright 2018 Jennings Advisory Group LLC 130

205

The Act – §199A Page 117

Pass Through Business Inc – S 4/5

• Example

• Judy’s taxable income is $125,000, her
business income is $110,000 and her wages
are $0.

• Judy may claim a §199A deduction of
$22,000 ($110,000 x 20%)

– No limitations apply as Judy’s taxable income
is below the minimum threshold level of
$157,500

Copyright 2018 Jennings Advisory Group LLC 131

The Act – §199A Page 117

Pass Through Business Inc – S 5/5

• Example 2 – Specified service business

• Judy’s taxable income is $275,000, her
business income is $310,000 and her wages
are $150,000.

• Although Judy paid adequate wages to allow
her a full §199A deduction, her taxable income
is in excess of the maximum threshold amount
($207,500)

• Result – Because Judy is in a specified service
business, she may not claim the §199A
deduction under any circumstance

Copyright 2018 Jennings Advisory Group LLC 132

206

The Act – §199A Page 118

Pass Through Business Inc – S 1/3

• Specified service business limitation is
phased in for taxpayers between the
minimum and maximum taxable income
threshold amounts

• The phase in is calculated by determining
the ratio of taxable income in excess of the
minimum threshold amount and reducing
the §199A deduction by that amount

Copyright 2018 Jennings Advisory Group LLC 133

The Act – §199A Page 118

Pass Through Business Inc. – S 2/3

• Liam example

• Liam’s taxable income $187,500, more than
$157,500, but less than $207,500

– Liam’s business profit $100,000 (20% = $20,000)

– Liam paid wages of $50,000 (50% = $25,000)

• Limitation calculation

a. % of taxable income over threshold 60%

b. Applicable % 40%

Copyright 2018 Jennings Advisory Group LLC 134

207

The Act – §199A Page 118

Pass Through Business Inc – S 3/3

• Liam example – Limitation calculation for
specified service business

– Applicable business income

($100,000 x 40%) $40,000

– Applicable wages ($50,000 x 40%) $20,000

• §199A calculation

a. Qual. Business income deduction $ 8,000

b. Qual. Wage deduction $10,000

c. §199A deduction – lesser of a. or b. $ 8,000

Copyright 2018 Jennings Advisory Group LLC 135

The Act – §199A Page 119

Pass Through Business Income

• Other provisions of the §199A deduction

– Qualified business income does not include S
corp SH compensation or partner guaranteed
payments

• Or reasonable comp in a sole proprietorship

– Deduction allowed against taxable income, not
AGI (unlike the DPAD)

– Computed at the 1040 level, not 1120S or 1065

– Allowed for AMT with no adjustments

– Only US based income taken into account

– Investment income excluded

– Qualified business income is not part of an NOL

Copyright 2018 Jennings Advisory Group LLC 136

208

The Act – §199A Page 120

Pass Through Business Income

• §199A deduction allowed for co-op and REIT
dividends

– Co-op dividends include

• Patronage dividends
• Per-unit retains
• Qualified allocations from qualified organizations

– REIT dividends include any dividend which is not
a capital gain or qualified dividend

• Also allowed for publicly traded partnership
income, including gain on disposition of
partnership interest

Copyright 2018 Jennings Advisory Group LLC 137

The Act – §199A Page 121

Pass Through Business Inc – S 1/2

• Deduction allowed for specified ag and
horticultural co-ops that are engaged in

1. The manufacturing, production, growth, or
extraction of ag or horticulture products

2. The marketing of ag or horticulture products
for customers who do #1, or

3. Who provide equipment, supplies or services
to those who do #1. or #2.

Copyright 2018 Jennings Advisory Group LLC 138

209

The Act – §199A Page 121

Pass Through Business Inc – S 2/2

• Deduction is the lesser of

– 20% of the excess of

1. Gross income of specified co-op, over
2. Qualified co-op dividends paid for and during tax year

OR,

– The greater of

1. 50% of the W-2 wages of the co-op, or
2. 25% of the co-op wages plus 2.5% of the unadjusted

basis of qualified property

• Cannot exceed taxable income for the year

Copyright 2018 Jennings Advisory Group LLC 139

The Act – §199A Page 122

Pass Through Business Inc – S 1/4

• Example on page 122

• Facts

– Mark and Kris file MFJ return
– Taxable income $365,000, more than $315,000, but

less than $415,000
– Mark’s K-1 income $200,000

• Allocable wages were $70,000

– Kris’s Sch. C income $190,000

• Allocable wages were $150,000
• Kris’s business is a specified service business

– Mark and Kris have REIT dividends of $10,000

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210

The Act – §199A Page 122

Pass Through Business Inc – S 2/4

• Step 1 – determine if wage limitation applies to
Mark’s business

– 20% of profit from Mark’s business $40,000

– 50% of wages from Mark’s business $35,000

– Wage limit is binding, calculation phase in must be
done

• Step 2 – calculate the reduction

– Income in excess of threshold $50,000

– Excess amount as a % 50%

– Reduction ($40,000 - $35,000) x 50% $ 2,500

– Mark’s §199A deduction $37,500

Copyright 2018 Jennings Advisory Group LLC 141

The Act – §199A Page 122

Pass Through Business Inc – S3/4

• Step 3 – calculate the specified service

business reduction for Kris

– Excess amount as a % 50% 20%

a. Qualified business income $95,000 $19,000

b. Qualified wage $75,000 $37,500

– Lesser of a. or b. Is Kris’s deduction $19,000

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211

The Act – §199A Page 122

Pass Through Business Inc – S 4/4

• Step 4 – calculate total §199A deduction on

the joint return

– §199A deduction allowed for Mark $37,500

– §199A deduction allowed for Kris $19,000

– §199A deduction for REIT $ 2,000

– Total §199A deduction allowed $58,500

Copyright 2018 Jennings Advisory Group LLC 143

The Act – §199A Page 124 - 125

Pass Through Business Income

• Check out our §199A Deduction Calculator
worksheets at page 124 and 125!

Copyright 2018 Jennings Advisory Group LLC 144

212

Page 127

Entity Choices – Sl. 1/2

• New law requires revisiting tax entity decision

– Low C Corp rate for all types at 21% is attractive
– Dividends taxed at capital gains rate is attractive
– But NII for higher income C Corp shareholders is a

negative

• Terminating a “S” for 2018 must be done by
3/15/18

– There is no “late retroactive termination” Rev. Proc.
– If done, cannot re-elect “S” for 5 years and there will be

a Presidential election in a few years.

Copyright 2018 Jenn1in4g5s
Advisory Group LLC

Page 127

Entity Choices – Sl. 2/2

• Some information needed to make decision:

• Entity profit Owner salary

• Entity fringes Owner fringes

• Entity distributions Owner other income

• Retirement plans Desired fringes

• Accumulated “S” earnings

• Accumulated 1065 loss basis issues

• 20% flow through qualified?

Copyright 2018 Jenn1in4g6s
Advisory Group LLC

213

Sole Proprietor Issues 128-131

ADVANTAGES DISADVANTAGES
• Easy start/stop • Liability
• No double tax • SE tax
• Informality • Poor fringe benefit
• Minor child wages
• Spousal employment for treatment
• High audit risk
fringes • Limited growth
• No basis rules
• Cash method allowed capabilities
• 20% flow thru deduction
• No NII tax

Copyright 2018  Jennings Advisory Group LLC

Partnership/LLC taxed as  128-131
partnership Issues

Partnership/LLC taxed as partnership Issues

ADVANTAGES DISADVANTAGES
• Low liability • SE tax for active owners
• Basis from debt • NII surtax for passive
• Unequal distributions
• Unreimbursed expense owners
• Poor fringe benefit
deduction
• Non cash distributions treatment
• Poor multi-state tax
are not taxable
• Step up basis characteristics
• 20% flow thru deduction • Non recourse debt

Copyright 2018  Jennings Advisory Group LLC

214

S Corporation Issues 128-131

S Corporation Issues DISADVANTAGES
• 1 Class of stock
ADVANTAGES • No unreimbursed s/h
• Low liability
• Single tax expense deduction
• Decent fringe treatment • No basis from debt
• Potential SE tax savings • BIG tax on conversions
• Cash basis • NII tax on passive owners
• Avoid NII surtax if active • Some owners not allowed
• Avoid Medicare surtax
• 20% Flow thru deduction

Copyright 2018  Jennings Advisory Group LLC

C Corporation Issues 128-131

C Corporation Issues

ADVANTAGES DISADVANTAGES
•Graduated tax rate • Double tax
•Low liability • No unreimbursed s/h
•Excellent fringe treatment
•Dividends taxed at LTCG expense deduction
rates • No flow through losses
•Extremely low audit profile • NII tax on all owners
•Very low flat tax rate • Penalty taxes-PSC, AET
• No 20% flow thru

deduction

Copyright 2018  Jennings Advisory Group LLC

215

Page 132

Entity Choices

• Case studies used a home-built Excel
spreadsheet to determine profits-shortcuts were
taken!

• Summary: In S corp’s with a flow-through
deduction they were the clear choice, but without
the flow through, or with lots of fringes the C
Corp might win

Copyright 2018 Jenn1in5g1s
Advisory Group LLC

Page 140-141

Entity Choices – S 1/2

• See “quick View” Entity guide

• New LLC electing as C Corp

– Form 8832, but no rush

• Existing LLC electing as C Corp

– Termination rules and time limits

• New Corp-already a C Corp and have Rev. Proc. 2013-30
to make a late retroactive S election if desired

Copyright 2018 Jenn1in5g2s
Advisory Group LLC

216

Case 1 Convert S to C 153
154
Page 146-150

1. BIG-N/A
2. Shareholder agreement >50%
3. Forms-election only
4. When Due-3/15 for retroactive

– Anytime for the future
5. Elections-None
6. Taxability-No
7. Taxability to owners-no
8. No required elections
9. No special forms
10. Basis as noted

Copyright 2018 Jennings Advisory
Group LLC

Case 2 Convert LLC to C

Page 151-156

1. BIG-N/A

2. Owners must all agree

3. Forms-8832 no new FEIN required

4. When Due-3/15 for retroactive

– Anytime for the future

– Late election options available

5. Elections-None

6. Taxability-No

7. Taxability to owners-no

8. No required elections

9. No special forms

10. Basis as noted Copyright 2018 Jennings
Advisory Group LLC

217

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