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If you’re a pass-through business owner, especially in a professional service field like healthcare, law, or consulting, the Section 199A deduction could provide substantial tax savings—if you meet certain requirements. The Tax Cuts and Jobs Act (TCJA) introduced the 199A deduction to allow eligible businesses to deduct 20% of qualified business income (QBI). However, for service businesses, the deduction phases out once taxable income reaches specific thresholds. Here’s how to make the most of this deduction before year-end, with clear examples to guide you.
1. Understand the Income Thresholds for Service Businesses
For specified service trades or businesses (SSTBs)—such as healthcare, law, and consulting—the Section 199A deduction phases out when taxable income exceeds certain limits. In 2024, the deduction begins to phase out above $191,950 for single filers and $383,900 for married filers filing jointly. If your income is close to these limits, strategic planning could help you maintain the full benefit of the deduction.
Example:
Consider a married couple, both doctors, with $400,000 in taxable income from their practice. Their income is above the threshold, so their 199A deduction would phase out unless they reduce their taxable income.
Income and Adjustments | Amount |
Qualified Business Income (QBI) | $400,000 |
Threshold for Married Filers | $383,900 |
Income Exceeding Threshold | $16,100 |
199A Deduction Phase-Out | Partial |
Planning Tip: Maximizing retirement contributions or harvesting capital losses could reduce taxable income below the threshold, preserving a larger 199A deduction(bradfordtaxinstitute.co…)(Last minute Tax Deducti…).
2. Harvest Capital Losses to Offset Gains
Capital gains add to taxable income, potentially pushing SSTBs over the income limit for 199A eligibility. Harvesting capital losses can help offset these gains, reducing taxable income and improving deduction eligibility.
Example:
A single healthcare practitioner with $200,000 in QBI also has $30,000 in capital gains. By harvesting $25,000 in capital losses, the practitioner reduces taxable income below the $191,950 threshold, preserving the deduction.
Income and Adjustments | Amount |
Qualified Business Income (QBI) | $200,000 |
Capital Gains | +$30,000 |
Harvested Capital Losses | -$25,000 |
Adjusted Taxable Income | $205,000 |
199A Deduction Eligibility | Partial |
Total Benefit: This strategic adjustment allows the practitioner to maintain a portion of the 199A deduction(bradfordtaxinstitute.co…).
3. Invest in Equipment to Utilize Section 179 Deductions
Section 179 allows business owners to deduct the cost of equipment purchases immediately, lowering taxable income and potentially improving 199A deduction eligibility. For SSTBs, it’s important to balance equipment deductions, as they reduce both QBI and taxable income.
Example:
Sarah, a dentist, plans to buy new equipment worth $30,000 before year-end. Her QBI stands at $250,000, and her taxable income is $385,000, just over the threshold.
Income and Adjustments | Amount |
Qualified Business Income (QBI) | $250,000 |
Taxable Income Before Equipment Purchase | $385,000 |
Section 179 Deduction (Equipment Purchase) | -$30,000 |
Adjusted Taxable Income | $355,000 |
199A Deduction on Adjusted QBI (20%) | $71,000 |
Total Benefit: By investing in equipment, Sarah lowers her taxable income and maintains a significant 199A deduction(bradfordtaxinstitute.co…).
4. Adjust Salaries for S Corporation Owners
SSTB owners operating as S corporations can maximize their 199A deduction by paying themselves a reasonable salary, which impacts QBI calculation. A balanced approach to salary helps satisfy IRS requirements while preserving the maximum QBI deduction.
Example:
Michael, a consultant, owns an S corporation generating $200,000 in QBI. He pays himself a $70,000 salary, which is reasonable for his role. With a taxable income of $270,000, he is below the threshold, allowing him to take the full deduction.
Income and Adjustments | Amount |
Salary (Reasonable Wage) | $70,000 |
Qualified Business Income (QBI) | $200,000 |
199A Deduction on QBI (20%) | $40,000 |
Total Benefit: By maintaining a reasonable salary, Michael ensures compliance with IRS requirements while optimizing his deduction(bradfordtaxinstitute.co…).
Why Choose TaxRx for Year-End Planning?
At TaxRx, we specialize in tax strategies for specified service trades and businesses. We’ll help you navigate the income limits, find the best way to manage capital gains and equipment deductions, and make sure you’re maximizing your 199A deduction in full compliance.
Our personalized, industry-specific strategies ensure that healthcare practitioners, consultants, attorneys, and other professionals don’t miss out on these valuable savings.
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