Welcome to Tax Season! Details on the New 199A Deduction

Tax season has begun. This week, I examine a new section to the Internal Revenue Code that intends to give some degree of parity to certain types of small businesses—you can find the details below.

The New Section 199A Deduction

Congress added a new section to the Internal Revenue Code. Section 199A is intended to give some degree of parity to small businesses that operate as partnerships, S corporations, sole proprietorships, trusts, publicly traded partnerships, and REITS. Since C corporations are now taxed at 21%, Congress decided to give small flow-through businesses taxed at the higher individual level a break. The deduction is limited to the lower of 20% of Qualified Business Income or 20% of the individual’s taxable income.

If you are a Service Trade or Business, i.e. health, law, accounting, actuarial services, performing arts, consulting, athletics, financial services, brokerage services, or any other trade or business that relies on the reputation or skill of one or more of its employees, then your deduction is only allowed if your taxable income is below $315,000 if filing MFJ and $157,500 for all others.

For businesses other than service—businesses whose owners have taxable income above the phase out limit of $415,000 for MFJ and $207,500 for all others—there are deduction limitations based on W-2 wages and depreciable assets. It is a little complicated, but it is a great deduction.

Tax Season Has Begun

The IRS has begun accepting 2018 tax returns and is issuing refunds. Now is the time to begin gathering your tax data and making an appointment with your tax preparer. If you need a tax preparer and would like to use our firm, then do not hesitate to give me a call and we will set an appointment for you.

That is all today. I look forward to visiting with you next week. In the meantime, don’t hesitate to reach out if you have a question—you can call my office at (713) 785-8939 or leave a comment on this post. I’d love to hear from you.

Net Operating Loss Deductions Under the New Tax Law

This week, I continue my exploration of the reforms brought about by the Tax Cuts and Jobs Act. Today’s topic: Net Operating Loss Deductions.

Net Operating Loss Deduction – Old Law

NOL deductions are computed on Schedule A of Form 1045 and taken on Line 21 of the Form 1040. Under the previous law, if your business incurred an operating loss (expenses exceeded revenues) or you as an individual incurred a disaster loss in a Presidential Disaster Area (Hurricane Harvey), then you could compute and use an NOL deduction. NOLs could be carried back either 2, 3, or 5 years depending on the type of loss, and then carried forward. The taxpayer also had the option to waive the carryback period, but to qualify they were required to attach an election to their timely filed tax return—and that includes the additional time allowed if they filed an extension. The Tax Cuts and Jobs Act changed things.

Net Operating Loss Deduction – New Law

The new law repeals the various carryback periods, but provides a two-year carryback for certain losses incurred in farming businesses and insurance companies. The new law provides that NOLs may be carried forward indefinitely. The new law also limits the amount of the NOL that may be deducted in any one year to 80% of taxable income, determined without regard to the NOL deduction itself. The effective date of the new law is defined as tax years beginning after December 31, 2017. Therefore, any taxpayer with NOL carryovers from tax years prior to January 01, 2018 will not be subject to the 80% of taxable income limitation and taxpayers will have to distinguish between the two types of losses when computing the NOL deduction.

That is all today. I look forward to visiting with you next week. Let me know if you have a question—you can reach my office at (713) 785-8939 or just leave a comment on this post.