Law in the Marketplace: Talking qualified business income deduction tax - Concord Monitor
Like it or not, we’re now deep in the heart of tax time. As you may know, Internal Revenue Code Section 199A provides to most owners of New Hampshire businesses a 20% annual federal income tax deduction from their shares of the income of their business. If you’re the only owner or a part owner of a privately owned New Hampshire business, your key 2022 federal tax issue will very probably be an IRC Section 199A issue. Here’s what you should know about Section 199A:
If the taxable income you report in your federal tax return for 2022 will be less than your Section 199A “threshold amount” (explained below) your Section 199A deduction will be 20% of your share of your company’s net business income. If you file your federal tax return separately, your 2022 threshold amount will be $170,050. If you file it jointly with your spouse, it will be twice that amount — namely, $340,100.
Thus, if your federal taxable income is less than your Section 199A threshold amount, your key objective should be to maximize your net business income and thus to maximize your 20% Section 199A deduction.
For many New Hampshire business owners whose businesses are sole proprietorships, single-member LLCs or multi-member LLCs taxable as partnerships and whose taxable income is less than their Section 199A threshold amount, the best way to achieve the above maximization is, for federal tax purposes, to pay yourself compensation for your services for your business in the form of distributions from allocations of income to you by your business. You should not pay yourself compensation for these services in the form of a salary. (However, for New Hampshire Business Profits Tax purposes, it will be OK for you to pay yourself a salary.)
In the case of sole proprietors and members of single-member LLCs, these LLC distributions will usually mean distributions of all of their income. For members of multi-member LLCs, it will mean distributions of the income allocated to them under their operating agreements or, if they have no operating agreement, LLC distributions of income required to be allocated to them by their LLCs under the New Hampshire LLC Act. (Allocations by multi-member LLCs to their members are basically mere book entries of LLC income owed to the members, as required by their operating agreement or by the New Hampshire LLC Act. Distributions are actual transfers of cash by these LLCs to their members (often by check).
However, if your taxable income exceeds your threshold amount, the rules determining your Section 199A deduction will be completely different than those described above; they will be vastly more complex; and tax return software may well apply them erroneously.
For one thing, Section 199A rules will apply to you in very different ways depending on whether your business is a “specified service trade or business” (an “SSTB”) or a “qualified trade or business” (a “QTOB”). People whose businesses are SSTBs include accountants, actuaries, attorneys, consultants, and health care providers. QTOBs mean all other types of businesses, trades and professions. For example, if you’re an architect, an engineer or a sales professional, your business for Section 199A purposes is a QTOB.
I happen to believe that there’s a way of explaining in plain English even the most complex Section 199A rules applicable to individuals whose taxable income exceeds their threshold amounts. In the next two columns, I’ll do my best to achieve this goal.
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-45508466
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