If you have not read my initial post on the Sec. 199A QBI deduction, please do so now. Follow the link HERE. If you were directed from the original post, please continue to read on.
TCJA enacted the Sec. 199A QBI deduction. The deduction allows eligible taxpayers to deduct up to 20% of their qualified business income. Sec. 199A places several limitations on the deduction based several factors, including taxable income and business category type (QTB vs. SSTB). The purpose of this post is to explain and provide an example relating to taxpayers with taxable income between the threshold amounts. Depicted below are the 2019 single and married filing jointly taxable income thresholds relating to the QBI deduction:
For 2019, the depicted taxable income thresholds will apply for the QBI deduction calculation. For taxable incomes between the threshold amounts (if single, $160,700 – $210,700), special and complex rules apply. In my previous Sec. 199A QBI post, I grouped taxpayers into three types (type 1, type 2, & type 3). For consistency, I only discuss type 2 in this post. Lets begin!
To refresh, Sec. 199A applies two limitations to the QBI deduction, which include the W-2 wage and property limitation and the overall taxable income limitation.
W-2 wage and property limitation
The taxpayer’s taxable income triggers the W-2 wage and property limitation. When applicable to the taxpayer, the W-2 wage and property limitation limits the QBI deduction to the greater of:
- 50% of W-2 wages for the business entity; or
- 25% of the W-2 wages + 2.5% of the unadjusted basis of all qualified property.
Overall Taxable Income Limitation
Sec. 199A also places an overall taxable income limitation on the QBI deduction. The overall taxable income limitation states that the QBI deduction is the lesser of:
- QBI deduction; or
- 20% of the taxpayer’s taxable income in excess of net capital gains
Type 2 [Taxpayers with taxable income between $160,700 - $210,700 (S)/$321,400 - $421,400 (MFJ)]
- If QTB, then phase-in the W-2 wage and property limitation
- If SSTB, then QBI, W-2 wages, and qualified property amounts are reduced, followed by the phased-in W-2 wage and property limitation reduction
I will not provide an example of a Type 2 SSTB taxpayer. If requested, I can provide an example. Please comment your questions and thoughts. Share with anyone confused on Sec. 199A qualified business income deduction.