{"id":6318,"date":"2017-12-27T07:06:06","date_gmt":"2017-12-27T15:06:06","guid":{"rendered":"http:\/\/evergreensmallbusiness.com\/?p=6318"},"modified":"2019-01-29T14:00:01","modified_gmt":"2019-01-29T22:00:01","slug":"pass-thru-entity-deduction-principal-asset","status":"publish","type":"post","link":"https:\/\/evergreensmallbusiness.com\/pass-thru-entity-deduction-principal-asset\/","title":{"rendered":"Section 199A Deduction and Principal Asset Disqualification"},"content":{"rendered":"

\"pass-thru<\/a><\/p>\n

Do you own a pass-through entity? You may already know the new tax law provides a gigantic new tax break. The Section 199A pass-through entity deduction.<\/p>\n

The deduction counts as really good news. It can shelter the last 20% of the income you earn in a business from income taxes.<\/p>\n

But the bad news? Successful service businesses may get disqualified from using the deduction.<\/p>\n

Tip:<\/strong> If you\u2019re not yet knowledgeable about the new Section 199A pass-thru entity deduction, stop here. Go read our blog post Pass-thru Income Deduction:\u00a0 Top Twelve Things Every Business Must Know<\/a>. This blog post assume you know the stuff covered in that other post.<\/p>\n

Note:<\/strong> One other thing to mention here. We have updated this blog post’s information for the Section 199A final regulations that appeared in January 2019. Just so you know…<\/p>\n

How Service Business Disqualification Works<\/h2>\n

Disqualification occurs for most high-income \u201cwhite collar\u201d professionals (doctors, lawyers, accountants, consultants, and so on). Also, successful actors and musicians and athletes get lassoed into the specified service category. And then so do then investment bankers, brokers and advisers.<\/p>\n

What counts as “high income?” When a taxpayer’s income rises over $207,500 for a single taxpayer and over $415,000 for a married taxpayer.<\/p>\n

Further, the statute includes a vague catchall. That catchall says that any high income business owner also gets disqualified if they earn their income in a<\/p>\n

trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees or owners.<\/p><\/blockquote>\n

And it’s this special form of “fuzzy disqualification” I want to talk about here.<\/p>\n

Predictably, the fuzzy disqualification generated a bunch of questions from taxpayers right after the Congress passed the law. For the obvious reason, the disqualification appeared to hit every one person business.<\/p>\n

Reputation or Skill Definition<\/h2>\n

When the IRS published its Section 199A regulations , however, they very narrowly defined the “reputation or skill of 1 or more employees or owners” language. Specifically, they said this disqualification refers only to three situations:<\/p>\n