Comments on: The Retirement Saving Section 199A Deduction Connection

By: Steve

Steve — Fri, 31 Aug 2018 14:03:00 +0000

In reply to Mark.

Hi Mark, first sorry for slow response…

Second, see if this example clears the fog. Compare two taxpayers. Both operate the same business (a one person shoe repair shop). Both make $100K in profits.

The only difference is the entities: Cobbler #1 operates as a sole proprietorship–so his $100K of business income is his qualified business income. Potentially, he gets a Section 199A deduction equal to $20K.

Cobbler #2 operates as an S corporation. He calls $40K of his $100K of profit W-2 wages and the remaining $60K appears on his K-1. His qualified business income equals $60K and potentially he gets a Section 199A deduction equal to $12K.

What’s happening here is probably clear, but I have a compulsive personality. Accordingly, I am compelled to point out that the S corporation cobbler essentially “loses” $40K of qualified business income because he’s had to categorize $40K of the business income as W-2 wages.

Hope that helps.

By: Mark

Mark — Sat, 25 Aug 2018 04:06:56 +0000

Hi Steve,
I’m struggling with the stature where it says W-2 compensation for an S corp shareholder is “not incuded” in QBI. Since QBI is the net of specific items of income and deduction and shareholder W-2 comp is a deduction then by excluding it from QBI it’s a good thing, right? Its good in that it would increase QBI if you were to take away the deduction in the QBI computation? Am I seeing this correctly? I’ve heard other writers complain about this part of the law but it seems very tax-payer friendly to eliminate it from QBI.
Thanks
Mark

By: Steve

Steve — Fri, 24 Aug 2018 21:13:32 +0000

In reply to Peter. Hi Peter, so good question. And you're right. Your Section 199A deduction equals lesser of 20% of $50K of QBI.... or 20% of your taxable income which is just under $60K per your numbers. so 20% of $50K or $10K is the deduction.

By: Peter

Peter — Fri, 24 Aug 2018 20:54:40 +0000

Hi Steve. I left this comment over at the Mad Fientist blog post but I’ll re-post it here below. I think in this article you answered my question. I think an easy way to calculate in a situation of a W2/Qualified Business Income (QBI) couple, if W2 exceeds QBI, then the 199A Deduction equals 20% of the QBI.
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Thank you so much for the article!

A clarifying question: My W2 this year will be ~$70,000 and my wife’s Qualified Business Income will be ~$50,000. So if I’m reading this right, we will take the standard deduction of $24,000, my wife will max out her Solo 401k at $18,500 and will contribute to her SEP IRA at ~$8,000 and we will take the $11,000 for both of our Traditional IRAs. In total we have $61,500 in deductions ($24,000 + $18,500 + $8,000 + $11,000) and since that total is smaller than my W2 of $70,000, then my wife’s Qualified Business Income is still $50,000 and we will get a deduction of $10,000?

Again thank you for the great article!