Section 199a questions

[marbar]

Hello,

I have some questions regarding the Section 199a deduction given that I have a windfall this year. I am not certain if my taxable income will phase me out of the deduction, and the regulations are quite complicated!

I have a low 6 figure salary and about $35k net income from a new software development side business that is a single-member LLC. I do software development, service, and support for a couple of clients through this side business. In addition, I received about $100k in capital gains from the sale of a previous business.

I file my taxes as a single.

My questions:
(1) I am not clear if my side work is considered a specified service business and thus my income will phase me out of the 199a deduction this year.
(2) If I am not phased out, how would I estimate my deduction?
(3) I already used some of that 35k to fully fund the salary-deferral portion of my solo 401(k) since my main employer has no plan. Was that a mistake?
(4) I invest in an REIT ETF in a taxable brokerage account. Can I deduct the last 20% of dividends from the ETF? How will this manifest when filing my taxes? Do I need to do anything special?

I do have an accountant, but I am not confident they could field all of these questions accurately, unfortunately!

[terran]

1) I'm a web developer, but our income is below the phase out so I haven't worried about it.
2) If you qualify, then your Qualified Business Income will be your net business income (after all business expenses) minus any tax deferred self employed retirement plan contributions minus 1/2 of SE employment taxes. Since you have much higher taxable income than QBI you don't need to worry about the taxable income limitation, so your QBI deduction will be 20% of your QBI.
3) Maybe. As I mentioned in (2), tax deferred self employed retirement plan contributions reduce QBI, so you effectively only get 80% of the deduction for the contribution since you get 100% of the contribution deduction, but lose 20% of the QBI reduction. So if you're in, say, the 22% bracket your actual marginal tax savings on these contributions are 17.6%. This fact doesn't change how you decide whether you should contribute to a tax deferred retirement account -- that's still about marginal rate savings now vs expected marginal rate in retirement -- but since it lowers the marginal rate savings now it might change the result of the decision making process. Roth self employed retirement plan contributions don't lower QBI, so that's another option if you decide the marginal tax savings of tax deferred aren't worth it. It's too late for what you already contributed though.
4) I don't know about this. https://seekingalpha.com/article/4212395-section-199a-reit-deduction-how-to-estimate-for-2018 says that the REIT should indicate the amount on the 1099-DIV they send you.

[marbar]

Thanks for the reply.

(1) From what I can tell, my business is not a "specified service trade or business" and won't be subject to phase-out because of it. This appears to be because "consulting" is defined rather narrowly (I'm not providing advice, etc). Also "any trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees" has been clarified to apply only to celebrity-type figures. https://www.irs.gov/pub/irs-drop/td-reg-107892-18-corrected.pdf should you be so inclined... (but I cannot recommend it).

(2) What you say makes sense.

(3) I have some more thinking to do on this front. https://www.pai.com/blog/qbi-deductions-vs-401k-savings-what-makes-the-most-sense-for-small-business-owners provides some examples to consider

(4) Thanks for highlighting this! I looked at my 1099-DIV and it did have Section 199A Dividends in box 5, so hopefully it was naturally taken in to account...

[LightStache]

I've been looking at this too and been struggling with some of the details, so I'm glad to see others posting about it.

I have a low 6 figure salary and about $35k net income from a new software development side business that is a single-member LLC. I do software development, service, and support for a couple of clients through this side business. In addition, I received about $100k in capital gains from the sale of a previous business.

One thing I will add is that I believe capital gains are excluded from phaseout income, so if "low 6 figure salary" means $125K, plus $35K QBI, less $7K 401K (20% of your QBI), less $12K std deduction -- you're significantly below the phase out range. Best to double check me on the exclusion of capital gains in the calculation.

I do have an accountant, but I am not confident they could field all of these questions accurately, unfortunately!

This has been my experience too! What gives!?!