Year-End Tax Planning: Section 199A Deduction

November 3, 2022
  • facebook
  • linkedin
  • twitter
  • google plus

If you are a business owner, Section 199A of the Tax Cuts and Jobs Act (TCJA) allows you to deduct up to 20% of your qualified business income (QBI) as part of your personal income taxes. It may depend on your business structure, income level, and a variety of other factors. It’s important to understand how Section 199A tax deductions work and the year-end tax planning steps you may want to take now in order to increase your deductible amount.

If you don’t plan properly, your tax deduction could be significantly reduced—or completely eliminated. Here are three potential year-end tax moves that could enable you to boost your Section 199A deduction and reduce your overall income tax liabilities.

If your 2022 taxable income is above $170,050 (or $340,100 for a joint return), the following items could reduce or eliminate your Section 199A tax deduction:

  • Type of business
  • Wages paid
  • Property ownership

If your deduction amount is less than 20% of your QBI, you should consider using one or more of the strategies below to increase your Section 199A deduction.

1. Capital Losses

Capital gains will add to your taxable income, which affects your Section 199A deduction in the following ways:

  • Determines your eligibility for a Section 199A tax deduction.
  • Sets the maximum amount of your eligible Section 199A deduction.
  • Establishes when you need wages and/or property to obtain maximum deductions.

If capital gains are going to increase your income and thus reduce your Section 199A tax deduction, you still have time before the end of the year. You will want to harvest any capital losses to offset the capital gains.

2. Charitable Contributions

Your Section 199A deduction ceiling is based on your Form 1040 taxable income. Therefore, you will want to utilize itemized deductions to increase your eligible Section 199A deduction maximum.

One strategy to reduce taxable income is to make charitable contributions. The holidays are already a good time for giving, so make some tax-deductible donations before the end of the year. This is a good plan if you are already planning to itemize. If you don’t itemize, then the charitable contributions may not make as much impact relating to Section 199A eligibility.

3. Business Assets

With 100% bonus depreciation and Section 179 expensing still in full effect through 2022, you can write off the entire cost of most business assets that are purchased and put into place before December 31.

100% bonus depreciation will start phasing out in 2023, so now is the time to take advantage of the full deduction. It can help your Section 199A tax deduction in two ways:

  1. A large asset purchase and write-off can reduce your taxable income and increase your Section 199A deduction (if it puts you below the required threshold).
  2. A large asset purchase and write-off can contribute to a higher section 199A deduction if it currently includes the 2.5% of unadjusted basis in your business’s qualified property. Your asset purchases effectively increase your qualified property, which in turn increases your Section 199A deduction.

Planning for Section 199A tax deductions and preparing your business and personal tax returns to claim them can be rather confusing. It helps to talk with an experienced tax planner, who can help you make the right decisions before this tax year is complete. Contact Illumination Wealth today for help with all your year-end tax planning needs.