$157,500 and $315,000 Question

[Kram BergGold]

First do the amounts $157,500 and $315,000 in the new law concerning the business deduction refer to business income, AGI or Taxable Income?
second, if a taxpayer's income is below the applicable threshold, does he or she then get a 20% deduction regardless of the occupation, employee status, and tangible assets?

[kathyc2]

First do the amounts $157,500 and $315,000 in the new law concerning the business deduction refer to business income, AGI or Taxable Income?
second, if a taxpayer's income is below the applicable threshold, does he or she then get a 20% deduction regardless of the occupation, employee status, and tangible assets?

They went against the norm and made it TAXABLE income rather than AGI. They did at least say that the 199 deduction does not come into play for the deduction so we don't have a circular calculation. It should be noted that the 157.5/315 is not absolute, but where phaseout starts.

[TaxGuyBill]

They went against the norm and made it TAXABLE income rather than AGI. They did at least say that the 199 deduction does not come into play for the deduction so we don't have a circular calculation. It should be noted that the 157.5/315 is not absolute, but where phaseout starts.

I agree.


To answer Kram's other question, yes, if "taxable income" is under those amounts, the 20% reduction is valid regardless of ccupation, employee status, and tangible assets

[New York Enrolled Agent]

I agree.


To answer Kram's other question, yes, if "taxable income" is under those amounts, the 20% reduction is valid regardless of ccupation, employee status, and tangible assets

TGB, Kathy and others who are following the progress of the new §199A.

What's your take on any deduction for rental activities? Typically, rental activities have not been considered as a §162 trade or business. However, some (certainly not all) commentators have suggested that the 2.5% asset limitation was written to include rental activities.

One post on a message board had an explanation of the section written by a CPA firm in CO with an example showing an individual taxpayer with three rental properties with net incomes of $20K, $5K and ($8k). The example aggregated the three to $17K and said there would be a 20% deduction of the $17K. I realize there are no regulations yet and we are still in the "learning curve" but what's your opinion on this? Do you think that the 2.5% addition to the final bill allows rental activities to get the deduction?

[kathyc2]

This can produce some crazy results. Take a single self employed person without employees that rents instead of owning home so they take standard deduction.

At 170K of QBI less 12K standard deduction, they will get essentially the full 20% or 34K deduction. That makes taxable income 124K and FIT is 24,049.

If instead of 170K, the QBI income is 220K. After 12K standard deduction, they are totally phased out so no 199A deduction. Their taxable income is 208K and tax is 48,489.

Adding 50K of income increases FIT by 24,440 or an effective rate of 49% on the additional 50K of income.

[kathyc2]

NYEA:

Even though rental income is not normally what we think of as a "trade or business", I'm guessing the regs will allow it. The guess is based mainly on the REIT income qualifying.

[TaxGuyBill]

I'm undecided. I had originally thought "no", and was surprised when I had read that example on that CPA's website. However, I am now leaning slightly towards "yes".

A few thoughts:

(1) As a general rule, most tax preparers do NOT send out 1099-MISCs for services for rental properties. That means we have not been treating it as a "trade or business". If it is a "trade or business", then 1099-MISCs would be required.
(2) The questions on Schedule E and the Instructions do seem to indicate that 1099s are "generally" required. That would mean it would be a "trade or business".
(3) The 3.8% NIIT from §1411 further confuses the matter.
(4) Letter ruling 9840026 is interesting. In part, it says "the rental of even a single property may constitute a trade or business under various provisions of the Code."
(5) If a Single rental property was not a "trade or business", what about multiple properties? What about Real Estate Professionals? What about those who meet Material Participation?


I really, really hope the IRS or Treasury gives clear, definite direction in this matter.

[DaveinTexas]

2.5% and the Bob Corker kickback

This is known as the Bob Corker kickback. The 2.5% of depreciable assets provision was added at the last minute to save real estate folks quite a bit of money. If the undadjusted basis of a client's real estate portfolio is say, $10MM, and the flow through income (all 1040, Schedule E rentals) is $500,000, the deduction under this provision would be the lesser of $100,000 or $250,000.

Not bad for not paying a single dollar in W2 wages. In fact, if this provision weren't enacted, the deduction would've been $0.

I can't find the article at the moment, but someone said this tweak in the bill might save Corker hundreds of thousands in tax. Left untouched, he would've received nothing. Sometimes it pays to play the game.

[TaxGuyBill]

Yeah, I've now heard some credible sources assert that rental activities are included.

[DaveinTexas]

They most certainly are included

Yeah, I've now heard some credible sources assert that rental activities are included.

Wow! How do these folks move so quick on this stuff? https://www.watsoncpagroup.com/secti...SAAEgKpQvD_BwE

Handy information indeed.

[kathyc2]

Wow! How do these folks move so quick on this stuff? https://www.watsoncpagroup.com/secti...SAAEgKpQvD_BwE

Handy information indeed.

I have to wonder to what extent IRS will crack down on reasonable salary. With 199A, taking a salary that is less than reasonable will not only effect FICA tax but also FIT. I got a chuckle from the example of the S-corp accountant without employees taking a 50K salary and 100K pass through income. Yeah, that 50K is reasonable. Not!

[Twin Turbo Z]

The state of Ohio has had this type of "business deduction" for several years. Here in Ohio one can deduct up to $250,000 of business income for single and married filers. And $125,000 for MFS filers. This includes rental income too. A hell of a deal. Just hope the next Governor doesn't decide to scrap the credit. Thank you John Kasich !!!

[DaveinTexas]

Good Point

I have to wonder to what extent IRS will crack down on reasonable salary. With 199A, taking a salary that is less than reasonable will not only effect FICA tax but also FIT. I got a chuckle from the example of the S-corp accountant without employees taking a 50K salary and 100K pass through income. Yeah, that 50K is reasonable. Not!

I wonder if part of the reasoning behind this law is to force S Corps (for shareholders with Taxable Income greater than the threshold) to pay Officer Compensation. Especially for those one man S Corps that are not Service Based (SSB). A guy that thinks he can get away with a $36,000 salary and another $500,000 in profit distributions will be limited to a measly $18,000 deduction. Where, if he increased his salary to say, $200,000, he could net a $60,000 deduction! Great way for the IRS to net more payroll taxes and he "might" be in better compliance. At some point, there will be a way to figure a break even point (tax savings from the deduction offset by the increase in payroll taxes).

Maybe there will be someone on this board that can create an Excel spreadsheet for this; kinda like the guy that came up with the spreadsheet to figure the affordability 8% for ACA....

[TaxGuyBill]

I wonder if part of the reasoning behind this law is to force S Corps (for shareholders with Taxable Income greater than the threshold) to pay Officer Compensation. Especially for those one man S Corps that are not Service Based (SSB). A guy that thinks he can get away with a $36,000 salary and another $500,000 in profit distributions will be limited to a measly $18,000 deduction. Where, if he increased his salary to say, $200,000, he could net a $60,000 deduction! Great way for the IRS to net more payroll taxes and he "might" be in better compliance. At some point, there will be a way to figure a break even point (tax savings from the deduction offset by the increase in payroll taxes).

Maybe there will be someone on this board that can create an Excel spreadsheet for this; kinda like the guy that came up with the spreadsheet to figure the affordability 8% for ACA....

I think you have things reversed. The 20% reduction is NOT on salary (or Guaranteed Payments), it is on the pass-through income.

So in your example, the $36,000 salary could get a $100,000 reduction (based on $500,000 of pass-through income, and assuming the limitations did not restrict anything), and the $200,000 salary would only give a $60,000 reduction (based on $300,000 of pass-through income, and assuming the limitations did not restrict anything).

So increasing wages will decrease the 20% reduction. So this will encourage even more people to not tax reasonable salary.

[DaveinTexas]

I knew I shouldn’t have been eating Cheetos and posting!

I think you have things reversed. The 20% reduction is NOT on salary (or Guaranteed Payments), it is on the pass-through income.

So in your example, the $36,000 salary could get a $100,000 reduction (based on $500,000 of pass-through income, and assuming the limitations did not restrict anything), and the $200,000 salary would only give a $60,000 reduction (based on $300,000 of pass-through income, and assuming the limitations did not restrict anything).

So increasing wages will decrease the 20% reduction. So this will encourage even more people to not tax reasonable salary.

You nailed it, you are most correct sir. My apologies, I was all mixed up there! I need a spreadsheet to keep this straight and if my head wasn’t attached, I’d need wood screws!!