The 20% Deduction (aka Section 199A)

Section 199A deduction also known as the Qualified Business Income deduction arises from the Tax Cuts & Jobs Act of 2017. This is a significant tax break for small business owners but there are rules and limits of course.

Section 199, without the A, is the section covering Domestic Production Activities Deduction. Section 199A is seemingly modeled after this (or at least a portion was ripped off by legislators) since the mathematics and reporting are similar between Section 199A and Section 199. Recall that Domestic Production Activities Deduction was reported on Form 8903 and eventually deducted on line 35 of Form 1040 (rumor is it’s now dead).

However, it appears that Section 199A Qualified Business Income deduction is a deduction from adjusted gross income to arrive at taxable income (what we nerds call a below-the-line deduction, from AGI). This is contrasted with an adjustment to gross income to arrive at adjusted gross income (what we nerds call an above-the-line deduction, for AGI).

It is unclear how Form 1040 will be modified to accommodate this new deduction- personal exemptions no longer exist so there is room to replace one deduction with another. We’d all despise seeing Form 1040 move to three pages. Yuck.

“The line” essentially lines 37 and 38 of the Form 1040 which represent adjusted gross income (AGI). The calculation is complicated, and will no doubt take additional time, which may result in increased fees. We don’t like that any more than you do, I promise! It is also likely that we may need additional information from you in order to do this, so please make sure you complete our business organizer for 2018.