28 | RKL 2018 Year-End Tax Planning Guide RKL 2018 Year-End Tax Planning Guide | 29 WANT TO ASSESS ELIGIBILITY FOR SECTION 199A? RKL can help. There’s a lot to unpack around this new deduction, so be sure to enlist the professional expertise of your RKL tax advisor for help assessing the impact of income thresholds and phase-outs, setting compensation and wages at optimal levels and evaluate other methods to maximize Section 199A eligibility within the context of your unique financial circumstances. The Tax Cuts and Jobs Act created a new section of the tax code, Section 199A, which allows certain business owners to avoid tax on 20 percent of their business profits, referred to in the law as “qualified business income.” This may result in lower taxes for the owners of eligible pass-through entities. There are many factors that impact the business owner’s eligibility for and amount of the deduction including type of business activity, employee wages, acquisition of qualified property and level of taxable income. Below, we highlight some key considerations to explore with your tax advisor when determining eligibility. Specified Service Provider Definition Language in Section 199A explicitly prohibits service professionals from taking the 20 percent qualified business income deduction. This includes professionals in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services or 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, as narrowly defined in proposed regulations. Action items for pass-through owners: • Closely review the NAICS codes on tax returns to make sure services provided by the business are not misrepresented. • Consider whether gross receipts fall under the threshold of new de minimis exception for businesses that both sell products and perform services – this may allow companies to escape the specified service provider designation. There is still hope for professionals within excluded fields. Section 199A makes an exception to the specified service trade or business based on taxable income. If a taxpayer’s taxable income from all sources (not adjusted gross income) for a given year is less than $157,000 for individuals or $315,000 for married filing jointly, plus $50,000 for single filers and $100,000 for joint returns, the taxpayer is eligible to take the Section 199A deduction. This benefit phases out at $207,500 for individuals and $415,000 for married filing jointly. SECTION 199A NEW PASS-THROUGH DEDUCTION Optimal Wage Levels Another factor determining eligibility for the Section 199A deduction is wages. In the most basic terms, a business owner’s deduction under Section 199A is limited to the greater of 50 percent of W-2 wages or 25 percent of W-2 wages plus 2.5 percent of the unadjusted basis of all qualified property used or held by the business. In order to fully take advantage of this deduction opportunity, business owners should make sure their wages are set at an appropriate level. The tax code defines W-2 wages as the sum of wages subject to withholding, elective deferrals and deferred compensation paid by the partnership, S Corporation or sole proprietorship during a given tax year. Keep in mind this does not include independent contractor or management fees. Action items for pass-through owners: • To satisfy the taxable income and wage optimization requirements of Section 199A, business owners may consider hiring independent contractors as employees. • Consider the appropriate grouping/aggregation elections to make on 2018 tax returns. The same taxable income threshold ($157,000 for individuals, $315,000 for married filing jointly) and phase-outs ($207,500 for individuals, $415,000 for married taxpayers) applied to specified services also apply here, so companies with taxable income under the amounts below may ignore the limitations on W-2 wages. RKL 2018 Year-End Tax Planning Guide | 29