P a s s - T h r o u g h C a l c u l a t i o n s : S e c t i o n 1 - PowerPoint PPT Presentation

P a s s - T h r o u g h C a l c u l a t i o n s : S e c t i o n 1 9 9 A Co hnRe znic k is a n inde pe nde nt me mb e r o f Ne xia I nte rna tio na l

Q u a l i f i e d B u s i n e s s I n c o m e D e d u c t i o n : § 1 9 9 A • Effe c tive re d uc tio n in ta x ra te o n c e rta in b usine ss inc o me • Ap p lie s to ta xp a ye rs o the r tha n c o rp o ra tio ns • Effe c tive fo r ta x ye a rs b e g inning a fte r De c e mb e r 31, 2017, a nd b e fo re Ja nua ry 1, 2026 2

Q u a l i f i e d B u s i n e s s I n c o m e D e d u c t i o n : § 1 9 9 A • De d uc tio n is d e te rmine d a nd ta ke n a t p a rtne r o r sha re ho ld e r le ve l • Sub je c t to limita tio ns, the d e d uc tio n is 20% o f the “ c o mb ine d q ua lifie d b usine ss inc o me a mo unt” p lus 20% o f the “ q ua lifie d c o o p e ra tive d ivid e nd s” 3

Q u a l i f i e d C o o p e r a t i v e D i v i d e n d s C e rta in typ e s o f d ivid e nd s p a id b y: • Fa rme rs’ c o o p e ra tive s • Any c o rp o ra tio n o p e ra ting o n a c o o p e ra tive b a sis o the r tha n - T a x e xe mp t o rg a niza tio ns - Mutua l sa ving s b a nks - Insura nc e c o mp a nie s - C o rp o ra tio ns e ng a g e d in furnishing e le c tric e ne rg y o r te le p ho ne se rvic e to p e rso ns in rura l a re a s 4

Q u a l i f i e d C o o p e r a t i v e D i v i d e n d s : T y p e s o f D i v i d e n d s • Pa trona g e divide nds: a mo unts p a id to a p a tro n o f a c o o p e ra tive o n the b a sis o f q ua ntity o r va lue o f b usine ss d o ne with suc h p a tro n • Pe r- unit re ta in a lloc a tion: a mo unts p a id to a p a tro n with re sp e c t to p ro d uc ts ma rke te d to him d e te rmine d witho ut re g a rd to the ne t e a rning s o f the c o o p e ra tive 5

Q u a l i f i e d C o o p e r a t i v e D i v i d e n d s : T y p e s o f D i v i d e n d s • Q ua lifie d writte n notic e of a lloc a tion: a writte n no tic e fro m a c o o p e ra tive tha t c a n b e re d e e me d fo r c a sh b y the p a tro n • O r a ny othe r simila r pa yme nt tha t is: - Inc lud a b le in g ro ss inc o me a nd - Re c e ive d fro m a n e ntity o f the typ e sta te d p re vio usly 6

C a l c u l a t i o n o f t h e D e d u c t i o n T he de duc tion is e qua l to the sum of: • T he le sse r of: - C o mb ine d q ua lifie d b usine ss inc o me o f the ta xp a ye r, o r - 20% o f the e xc e ss o f the ta xp a ye r’ s ta xa b le inc o me fo r the ye a r o ve r the sum o f a ny ne t c a p ita l g a in p lus q ua lifie d c o o p e ra tive d ivid e nd s a nd • T he le sse r of: - 20% o f the ta xp a ye r’ s q ua lifie d c o o p e ra tive d ivid e nd s fo r the ta xa b le ye a r, o r - T a xp a ye r’ s ta xa b le inc o me , re d uc e d b y ne t c a p ita l g a in 7

C o m b i n e d Q u a l i f i e d B u s i n e s s I n c o m e A m o u n t Sum of: • T he d e d uc tib le a mo unt fo r e a c h q ua lifie d tra d e o r b usine ss, plus • 20% o f the a g g re g a te a mo unt o f q ua lifie d REIT d ivid e nd s a nd q ua lifie d p ub lic ly tra d e d p a rtne rship inc o me 8

D e t e r m i n a t i o n o f t h e D e d u c t i b l e A m o u n t T he de duc tible a mount for e a c h tra de or busine ss is the le sse r of: • 20% o f the ta xp a ye r’ s q ua lifie d b usine ss inc o me with re sp e c t to the q ua lifie d tra d e o r b usine ss or • T he g re a te r o f : - 50% o f the W-2 wa g e s with re sp e c t to the q ua lifie d tra d e o r b usine ss, o r - T he sum o f 25% o f the W-2 wa g e s with re sp e c t to the q ua lifie d tra d e o r b usine ss p lus 2.5% o f the una d juste d b a sis imme d ia te ly a fte r a c q uisitio n o f a ll q ua lifie d p ro p e rty 9

Q u a l i f i e d P r o p e r t y • T a ng ib le p ro p e rty sub je c t to a n a llo wa nc e fo r d e p re c ia tio n tha t is he ld b y, a nd a va ila b le fo r use in, the q ua lifie d tra d e o r b usine ss a t the c lo se o f the ta xa b le ye a r, a nd whic h is use d a t a ny p o int d uring the ta xa b le ye a r in the p ro d uc tio n o f q ua lifie d b usine ss inc o me a nd the d e p re c ia b le p e rio d ha s no t e nd e d b e fo re the c lo se o f the ta xa b le ye a r. • De pre c ia ble pe riod: e nd s o n the la te r o f 10 ye a rs o r the la st d a y o f the la st full ye a r in the p ro p e rty’ s re c o ve ry p e rio d . 10

Q u a l i f i e d P r o p e r t y : E x a m p l e Pr ope r ty Pur c hase Pr ic e Ye ar Pur c hase d R e c ove r y Pe r iod $2,000,000 2006 39 ye a rs Building $100,000 2006 5 ye a rs E quipme nt $1,000,000 2006 L and $1,000 2010 5 ye a rs Compute r What is the amount of qualifie d pr ope r ty in 2018? 11

Q u a l i f i e d P r o p e r t y : E x a m p l e Pr ope r ty Pur c hase Pr ic e Ye ar Pur c hase d R e c ove r y Pe r iod $2,000,000 2006 39 ye a rs Building $100,000 2006 5 ye a rs E quipme nt $1,000,000 2006 L and $1,000 2010 5 ye a rs Compute r What is the amount of qualifie d pr ope r ty in 2018? $2,001,000 12

Q u a l i f i e d B u s i n e s s I n c o m e • Ite ms o f inc o me , g a in, d e d uc tio n a nd lo ss tha t a re e ffe c tive ly c o nne c te d with c o nd uc t o f a tra d e o r b usine ss within the Unite d Sta te s a nd • Is inc lud e d o r a llo we d in d e te rmining ta xa b le inc o me fo r the ta x ye a r 13

Q u a l i f i e d B u s i n e s s I n c o m e : E x c e p t i o n s • Q ua lifie d REIT d ivid e nd s, q ua lifie d c o o p e ra tive d ivid e nd s a nd q ua lifie d p ub lic ly tra d e d p a rtne rship inc o me • C a p ita l g a ins o r lo sse s • Divid e nd s • Inte re st inc o me o the r tha n wha t is p ro p e rly a llo c a te d to the tra d e o r b usine ss • Annuitie s o the r tha n wha t is re c e ive d in c o nne c tio n with the tra d e o r b usine ss • Fo re ig n b a se inc o me 14

Q u a l i f i e d T r a d e o r B u s i n e s s Any tra d e o r b usine ss o the r tha n: • A spe c ifie d se rvic e tra de or busine ss • T he tra d e o r b usine ss o f p e rfo rming se rvic e s a s a n e mp lo ye e 15

S p e c i f i e d S e r v i c e T r a d e o r B u s i n e s s • Any tra d e o r b usine ss invo lving the p e rfo rma nc e o f se rvic e s in the fie ld s o f he a lth, la w, a c c o unting , a c tua ria l sc ie nc e , p e rfo rming a rts, c o nsulting , a thle tic s, fina nc ia l se rvic e s, b ro ke ra g e se rvic e s, o r a ny tra d e o r b usine ss whe re the p rinc ip a l a sse t is the re p uta tio n o r skill o f o ne o r mo re e mp lo ye e s. • Also inc lud e s p e rfo rma nc e o f se rvic e s tha t c o nsist o f inve sting a nd inve stme nt ma na g e me nt, tra d ing o r d e a ling in se c uritie s, p a rtne rship inte re sts o r c o mmo d itie s. 16

L i m i t a t i o n s B a s e d o n Ta x a b l e I n c o m e • T he wa g e limita tio n a nd the e xc lusio n o f sp e c ifie d se rvic e b usine sse s p ha se s in fo r ta xp a ye rs with ta xa b le inc o me b e twe e n - Sing le : $157,500 – $207,500 - Ma rrie d filing jo intly: $315,000 – $415,000 17

S u b s t a n t i a l U n d e r p a y m e n t P e n a l t i e s With re g a rd to the § 199A d e d uc tio n, if the a mo unt o f und e rsta te d ta x e xc e e d s 5% (no t 10%) o r $5,000 , yo u a re sub je c t to the 20% und e rp a yme nt p e na lty. 18

E x a m p l e s

E x a m p l e 1 : F a c t s T a xp a ye r is a n 80% o wne r o f ABC Pa rtne rship , a la w firm with $200,000 ne t inc o me a nd $375,000 o f wa g e s. T a xp a ye r re c e ive s a g ua ra nte e d p a yme nt fo r se rvic e s o f $100,000 fro m ABC Pa rtne rship . T a xp a ye r re c e ive s $10,000 in d ivid e nd s fro m a REIT . • T a xp a ye r’ s filing sta tus: ma rrie d filing jo intly • T a xa b le inc o me : $250,000 20

E x a m p l e 1 • Sinc e T a xp a ye r’ s ta xa b le inc o me is und e r the thre sho ld a mo unt o f $315,000, the limita tio n fo r sp e c ifie d se rvic e b usine sse s d o e s no t a p p ly. • Also , the wa g e limita tio n d o e s no t a p p ly. • Note : T a xp a ye r’ s g ua ra nte e d p a yme nt inc o me is no t e lig ib le fo r the 20% d e d uc tio n; it is a kin to wa g e s a nd is ta xe d a t o rd ina ry ra te s. 21

E x a m p l e 1 : C a l c u l a t i o n Ste p 1: de te rmine the de duc tible a mount • L e sse r o f e ithe r: - 20% o f the ta xp a ye r’ s q ua lifie d b usine ss inc o me with re sp e c t to the q ua lifie d tra d e o r b usine ss ($200,000 x T a xp a ye r’ s 80% sha re x 20% = $32,000) o r - G re a te r o f:  50% o f wa g e s o r  25% o f wa g e s p lus 2.5% o f q ua lifie d p ro p e rty  Do e s no t a pply sinc e T a xpa ye r’s ta xa ble inc o me is o ve r the thre sho ld a mo unt • De d uc tib le a mo unt: $32,000 22