New IRS Form 8995 Instructions Shrink Section 199A Deduction for Many

[SeattleCPA]

If you run a small partnership or S corporation, and you plan to use Section 199A deduction in 2019 or your enjoyed in 2018 a nice Section 199A deduction, you probably want to review the new instructions:

https://www.irs.gov/pub/irs-dft/i8995--dft.pdf

IRS has really shrunk the deduction for some folks.

The main culprit is they make you, if you're  partnership or S corp, reduce your QBI for your self-employed health insurance twice...

E.g., a sole proprietor making (for easy calculation) $100,000 a year and paying say $10,000 a year for insurance, has $90,000 of income that plugs into the Section 199A formula.

A partnership partner or S corporation shareholder-employee making same $100,000 a year and paying same $10,000 for insurance has $80,000 of income that plugs into the Section 199A formula.

[jpdx]

Good find. It really seems like the 199A deduction was an ill-conceived mess. In this area especially, we've taken a step backwards from the goal of simplifying the tax code.

[SeattleCPA]

Good find. It really seems like the 199A deduction was an ill-conceived mess. In this area especially, we've taken a step backwards from the goal of simplifying the tax code.

The deduction saves some folks a TON of federal taxes. But agree with you, it is a pretty messy statute and set of regulations. Ugh.

[skuzuker28]

Don't have time to go through everything in detail (Hello, September 16th deadline!), but guess it's time to send in comments again.

[Malum Prohibitum]

If you run a small partnership or S corporation, and you plan to use Section 199A deduction in 2019 or your enjoyed in 2018 a nice Section 199A deduction, you probably want to review the new instructions:

https://www.irs.gov/pub/irs-dft/i8995--dft.pdf

IRS has really shrunk the deduction for some folks.

The main culprit is they make you, if you're  partnership or S corp, reduce your QBI for your self-employed health insurance twice...

E.g., a sole proprietor making (for easy calculation) $100,000 a year and paying say $10,000 a year for insurance, has $90,000 of income that plugs into the Section 199A formula.

A partnership partner or S corporation shareholder-employee making same $100,000 a year and paying same $10,000 for insurance has $80,000 of income that plugs into the Section 199A formula.

Can you help those of us who looked at the link but can't find what you are describing?  I searched for the words health insurance, which occur twice, but I cannot find what you are describing.   

As the owner of an S-Corp eligible for the deduction in 2019, I am very interested.  Thanks.

[SeattleCPA]

Can you help those of us who looked at the link but can't find what you are describing?  I searched for the words health insurance, which occur twice, but I cannot find what you are describing.   

As the owner of an S-Corp eligible for the deduction in 2019, I am very interested.  Thanks.

Here's my blog post that explains: How the IRS Destroyed the Section 199A Deduction for Small Business S Corporations and Partnership

[skuzuker28]

Can you help those of us who looked at the link but can't find what you are describing?  I searched for the words health insurance, which occur twice, but I cannot find what you are describing.   

As the owner of an S-Corp eligible for the deduction in 2019, I am very interested.  Thanks.

Here's my blog post that explains: How the IRS Destroyed the Section 199A Deduction for Small Business S Corporations and Partnership

I'll need to keep up on this.  The Charitable Contribution issue is easy enough to get around, but the SE health insurance is harder.  A lot of my clients have C-Corps in addition to their operating S-Corps, if this doesn't get fixed we'll definitely need to change which entity pays for the insurance.

[SeattleCPA]

I'll need to keep up on this.  The Charitable Contribution issue is easy enough to get around, but the SE health insurance is harder.  A lot of my clients have C-Corps in addition to their operating S-Corps, if this doesn't get fixed we'll definitely need to change which entity pays for the insurance.

So that's interesting. It had dawned on me that someone with both a sole proprietorship (some side gig thing) and an S corp ought to look at taking the SE health insurance deduction against their sole proprietorship income. That meant business owner paid SE taxes on the insurance... but didn't double-deduct the SE health insurance twice for purposes of calculating the Section 199A deduction.

But I think your idea is even better. I agree within the C corp, the health insurance benefit will save both income and payroll taxes.

[TVRodriguez]

That really sucks. But thanks for the heads up.

[jpdx]

I read your blog post -- informative and insightful, as always!

Currently, my partner and I deduct our home office expenses, as well as business use of cell phone and internet, as a "UPE" or "Unreimbursed Partnership Expenses" on our Schedule E. After reading your blog post, it seems we should rethink this practice and have the partnership reimburse some of these expenses directly. Right?

[SeattleCPA]

I read your blog post -- informative and insightful, as always!

Currently, my partner and I deduct our home office expenses, as well as business use of cell phone and internet, as a "UPE" or "Unreimbursed Partnership Expenses" on our Schedule E. After reading your blog post, it seems we should rethink this practice and have the partnership reimburse some of these expenses directly. Right?

I don't think UPE causes you the same trouble as SE health insurance... It does get deducted once. But not in effect twice...

BTW, be very happy to have one of the other tax practitioner regulars share a contrary point of view on this...

[MDM]

The IRS's "This may result in QBI being reduced at both the entity and the shareholder level" (A33 in Tax Cuts and Jobs Act, Provision 11011 Section 199A - Qualified Business Income Deduction FAQs that you linked in your blog post) seems, unfortunately, corroborative and not contrary.

Also seems unfair, so one could hope comments in the review period will cause rethinking....

[Malum Prohibitum]

So what if I am an S-Corp shareholder but purchase health insurance individually?


I found this using an internet search engine:


The Deduction If You’re Self-Employed
Self-employed persons can take a deduction for health insurance premiums they pay for coverage for themselves and their dependents directly on Form 1040. This is another above-the-line adjustment to income. You can enter the total of what you paid on line 29 on the first page of your 2018 tax return.

This is one of those deductions that can reduce your AGI from the total of your gross income, and you don't have to itemize your deductions to take it. It's not limited by the 7.5-percent-of-AGI rule—you can claim the entirety of what you spent on premiums, although you can’t add in any uninsured medical costs unless you also itemize—you would claim these on Schedule A along with all your other itemized deductions.

https://www.thebalance.com/deducting-health-insurance-3974024


Is it accurate?

My S-Corp does not buy my insurance, a fact I was not considering when I asked you a question, above.

[SeattleCPA]

So what if I am an S-Corp shareholder but purchase health insurance individually?


I found this using an internet search engine:


The Deduction If You’re Self-Employed
Self-employed persons can take a deduction for health insurance premiums they pay for coverage for themselves and their dependents directly on Form 1040. This is another above-the-line adjustment to income. You can enter the total of what you paid on line 29 on the first page of your 2018 tax return.

This is one of those deductions that can reduce your AGI from the total of your gross income, and you don't have to itemize your deductions to take it. It's not limited by the 7.5-percent-of-AGI rule—you can claim the entirety of what you spent on premiums, although you can’t add in any uninsured medical costs unless you also itemize—you would claim these on Schedule A along with all your other itemized deductions.

https://www.thebalance.com/deducting-health-insurance-3974024


Is it accurate?

My S-Corp does not buy my insurance, a fact I was not considering when I asked you a question, above.

The above post may be sort of accurate but also incomplete. Here's a fuller description, but to summarize, in order for s corp shareholder to get deduction, the premiums paid need to be included in wages:

https://www.irs.gov/businesses/small-businesses-self-employed/s-corporation-compensation-and-medical-insurance-issues

[SeattleCPA]

The IRS's "This may result in QBI being reduced at both the entity and the shareholder level" (A33 in Tax Cuts and Jobs Act, Provision 11011 Section 199A - Qualified Business Income Deduction FAQs that you linked in your blog post) seems, unfortunately, corroborative and not contrary.

Also seems unfair, so one could hope comments in the review period will cause rethinking....

My understanding is IRS has received plenty of negative feedback on this nonsensical bookkeeping since they updated their FAQ months ago to prescribe the "deduct twice" approach. The fact that they've now come out, months later, with instructions that again require double deductions suggests to some knowledgeable observers (like Ed Zollars) that they are firm about that.

I hope they change their minds. Or rather implausibly hope Congress will say, "hey, knuckleheads, knock it off. This was supposed to be a temporary sop to small businesses so they got some tax relief just like the C corps." But that perhaps reflects naiveté on my part