Preface: This blog is for entrepreneurs who are hereby advised to apply appropriate tax planning for their businesses activities to optimize the tax benefits and nuances of the new Section 199A tax laws, beginning with the 2018 tax year.

A Summary of the New Tax Laws For Section 199A (Segment II)
Tax Implications and Planning Features with the Qualified Business Income Deductions

Surpass the Threshold

What if you surpass the $315,000 MFJ and $157,500 Section 199A threshold? Well, tax planning becomes more complex and is then subject to certain individual tax planning nuances. First, the service business deduction goes to zero when exceeding the threshold. Further, qualifying businesses have a separate individual limitation on two levels 1) applicable to W-2 wages amounts, or 2) the combined W-2 wages and a 2.5% capital factor.

For example, the first step planning item nuance with the Section 199A threshold for high income entrepreneurs, is that tax planning must now occur on a business by business approach, with segregations of the individual business activities to determine (QBI) qualified business income optimization. Therefore, for entrepreneurs with multiple ownership interests e.g. Sch. C’s or K-1’s, the tax activity grouping features are now imperative. Secondly, tracking income and expense, and W-2 wages for each business, and the corresponding basis of fixed assets is an additional feature now of yearly tax planning. This planning is an advised tax accountant task.

Tax Planning with Section 199A Threshold

It appears that prior tax year groupings for net investment income tax provisions, will continue to work with Section 199A. However, groupings of business on W-2 wages and fixed assets are now aggregate considerations. In other words, the grouping features of an individual taxpayer have a new feature of consideration, and future aggregation will require specific individual tax planning. These groupings are a separate tax planning topic.

Furthermore, the industry code applied to a business tax filing has become increasingly important. A once more trivial consideration, the industry code reported to the IRS on the business tax filings, will now result in potential audit flags if misclassified as a service based activity, i.e. the IRS will apply scrutiny of industry codes on service business as subject to audit adjustments even if business income qualifies as non-service QBI, because the tax filing has classified the activities as service sourced revenue.

Adding to the tax planning nuances, fixed asset schedules are another key area of tax planning for purposes of qualified property factors for Section 199A when taxpayers exceed the threshold. More tax planning variables occur with the 2.5% qualified property factor calculated in the Section 199A deduction that permit business property owned and in service at the end of the tax year and produces qualified business income, to provide a tax deduction in the absence of W-2 wages.

This is a welcome tax rule improvement from the prior Section 199 DPAD. The in- service property’s unadjusted basis remains applicable for 10 years after placed in service, or the last day of the last full year of MACRS depreciation. The accuracy of fixed assets is now a pivotally global tax filing attribute.

Surprisingly to the entrepreneur’s taxation favor, the unadjusted basis of fixed assets for the Section 199A is not reduced by Section 179, bonus depreciation, or regular depreciation. Adding to the benefits, the unadjusted basis of assets is used for the greater of the recovery period of 10 years. Property basis for Section 199A is only reduced or eliminated if the asset is no longer used in the qualifying business. Therefore, if a business purchases $500,000 of equipment on March 1 of 2018, if the business deducts the $500,000 galaxy of asset additions, with bonus depreciation rules during 2018, the qualified property basis is still $500,000 for the Section 199A capital limit, i.e. the 2.5% of property computation. Adding to tax complexity, uncertain tax positions will now be relevant in say real estate partnerships with allocations of land and building allocations because the QBI limit will be adjusted based upon qualifying depreciable property.

End of Segment II – to be continued