Taxing Definitions

Definition — Qualifying the business income

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Have you figured out the new federal income tax deduction for qualified business income? You may know this as the section 199A deduction. (See Taxing Lessons post here.) If you’re one of the 23.7 million taxpayers the IRS estimates may be eligible, you can claim a deduction from your taxable income of up to 20% of qualified income from a business.

Because the 2018 tax year is the first time the deduction is available, the IRS didn’t have time to create a separate tax form to claim it. (Form 8995 is now in draft form and will be available for 2019 tax returns.) Instead, for tax year 2018, the IRS developed worksheets that you complete and retain with your records.

For purposes of the deduction, the worksheet references two categories of businesses.

Specified service trade or business: Any domestic trade or business, other than a C corporation, involving the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any business where the principal asset is the reputation of its employees.

Qualified trade or business: Any domestic trade or business, other than a C corporation, that is not a specified service trade or business and does not perform services as an employee.

These categories relate to one of the two limitations on the qualified business income deduction when your taxable income exceeds a certain level ($157,500, or $315,000 for joint returns).

Do you know which category of income will limit your deduction if the income threshold applies?

or

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Note: Taxing Lessons provides a summarized version of sometimes lengthy court decisions and IRS documents. The full documentation may include facts and issues not presented here. Please use the link provided in the post to read the entire document.

This information should not be considered legal, investment, or tax advice. Taxing Lessons and Top Drawer Ink Corp. do not provide legal, investment, or tax advice. Always consult your legal, investment, and/or tax advisor regarding your personal situation.

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✓ Right answer!

Two deduction limitations apply when your taxable income exceeds the threshold of $157,500 or $315,000 for joint returns.

A limitation based on wages paid and capital investment with respect to the trade or business (except in the case of qualified REIT dividends and qualified PTP income),

and

A limitation based the type of trade or business: A deduction for income from any business considered a specified service trade or business is limited.
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