Law in the Marketplace: Section 199A deduction for high earners - Concord Monitor
I’ve written this column and next Sunday’s column primarily for tax professionals. Thus, most New Hampshire business owners may not want to read them. However, these columns may be very useful to New Hampshire business owners who are “high earners” (as defined below) — especially if they do their own federal tax returns.
Internal Revenue Code Section 199A provides an amazingly large annual federal income tax deduction to owners of “pass-through businesses”; the amount of the deduction can be up to 20% of their shares of the income of their businesses. (As readers may know, “pass-through businesses” include state-law sole proprietorships, most single-member and multi-member LLCs, and all state-law business corporations taxable as S corporations).
As I wrote last week, for most business owners, the Section 199A provision for computing the deduction is very simple; under section 199A(b)(2)(A), it’s 20% of their share of the net business income of their business (i.e., 20% of their business income after all deductions).
However, the Section 199A provisions for computing the deduction for high earners are much more complex. In this column, I’ll briefly summarize these provisions. In next Sunday’s column, I’ll do my best to explain and exemplify in plain English the very complex but also very important Section 199A complexities applicable to high earners under Internal Revenue Code Subchapter S and under Section 199A(b)(3)(B).
By high earners, I mean single individuals whose taxable income for 2022 will be at or over $140,050 and married individuals whose 2022 taxable income will be at or over $340,100.
Under sections 199A(b)(2)(A) and (B) and 199A(b)(3)(B), the Section 199A deduction of high earners will be the lesser of:
The lesser of 20% of the net business income of their business, and the greater of:
If these businesses own no real property, 50% of the aggregate wages they pay their employee; or
If these businesses do own real property, 25% of their aggregate wages plus 2.5% of the “unadjusted basis” of this property in the year they acquired it.
“Unadjusted basis” means, in general, the amount they paid for the property.
To illustrate the terms of sections 199A(b)(2)(A) and (B), assume the following:
Joe Doe is married, and he files a joint federal tax return with his wife.
For 2022, his taxable income is $340,101. It thus exceeds the above $340,100.
He conducts his business through a single-member LLC.
His business owns no real property.
He has caused his business to make an election with the IRS to be taxable for taxable year 2022 as an S corporation. (I’ll explain next week why high earners should usually have their LLCs make this election.)
In 2022, his net business income will be $500,000.
In 2022, the amount of the aggregate wages his business will pay to its employees will be $310,000.
Under the above assumptions:
20% of the net business income of John’s business for 2022 will be $100,000 (i.e., 20% times $500,000).
50% of the wages his business pays to its employees will be $155,000.
Thus, under Sections 199A(b)(2)(A) and (B), his Section 199A deduction will be $100,000 (i.e., the lesser of his section 199A(b)(2)(A) deduction and his Section 199A(b)(2)(B) deduction).
So simple! But, as discussed next week, in many cases the computation of the section 199A deduction of high earners will be vastly more complex.
John Cunningham is a lawyer licensed to practice law in New Hampshire and Massachusetts. He is of counsel to the law firm of McLane Middleton, P.A. Contact him at 856-7172 or [email protected]. His website is llc199a.com. For access to all of his Law in the Marketplace columns, visit concordmonitor.com.
source: https://www.concordmonitor.com/Law-in-the-Marketplace-45611375
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