Section 199A Deductions

What is the section 199a deduction?

One of the most significant changes from the Tax Cuts and Jobs Act of 2017 was the creation of an income tax deduction for nearly all businesses that operate in the United States. This deduction is available to most taxpayers, except C-Corporations, equaling 20% of the qualified business income (QBI) of a business or trade for the tax years 2018 to 2025. 

Who qualifies?

All owners of pass-through entities and sole proprietors are eligible. However, income from a specified service trade or business is qualified for the deduction only if the taxpayer is below an applicable income threshold.  For 2019, income from specified service trades or businesses (SSTB) will be subject to the phase-out amounts when taxpayers taxable income is above $160,700 filing single or $321,400 filing married. A specified service business is a business that involves the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, investing, and investment management or trading, dealing in securities, partnership interests or commodities, or any business whose principal asset is the reputation or skill of one or more of the owners or employees.

Does rental activity qualify for the QBI deduction? 

A taxpayer who meets the safe harbor rules can treat income from a rental property as QBI.  To be eligible for safe harbor, taxpayers must pass an hours of service test. They must have at least 250 hours of rental related services performed each year for the rental property.  This may include but is not limited to advertising to rent the property, collecting rents, or managing daily operations. If the taxpayer doesn’t meet the safe harbor rules, the rental property may still qualify for QBI if it meets the definition of a trade or business. The safe harbor test includes aggregation rules, minimum hours of service rules, a definition of rental services, and contemporaneous records rules. To use the safe harbor, the taxpayer must attach a statement to the tax return that the requirements of Section 3.03 of Revenue Procedure 2019-7 have been met. The statement must be signed by the taxpayer or the pass-through entity’s authorized representative, under “penalties of perjury.”

How is it calculated?

The maximum deduction allowed is 20% of qualified business income.  However, there is another test when taxable income exceeds the phase-out amounts indicated above.  The qualified business income from an eligible business (that is not a specified service business) will be limited to the lesser of:

  1. 20% of the taxpayer’s qualified business income with respect to a qualified trade or business, and
  2. the greater of
    1. 50% of the W-2 wages with respect to the qualified trade or business, and
    2. the sum of 25% of the W-2 wages with respect to the qualified trade or business plus 2.5% of the unadjusted basis immediately after acquisition of all qualified property

So what does this all mean?

The qualified business income deduction involves a number of complex rules.  There is not one set of rules that fits all taxpayers. We highly encourage our clients to contact us to determine if they are eligible for the QBI deduction as this can represent thousands if not tens of thousands of dollars in potential tax savings. 

Reference: 

https://www.irs.gov/newsroom/tax-cuts-and-jobs-act-provision-11011-section-199a-qualified-business-income-deduction-faqs


Levels of Assurance in Financial Statements

There is some confusion as to the levels of assurance that we can provide in connection an entity’s financial statements. Many people have a misconception that we audit all financial statements that we issue, but there are actually several options that we offer.

If an entity needs a financial statement for management or the owners, we can prepare a financial statement and provide no “assurance” on them. We can do this in connection with bookkeeping services or as a stand-alone engagement. Typically, when we prepare financial statements, we do not include disclosures and often, we do not prepare a full set of financial statements. No formal report is issued on prepared financial statements.

If an entity needs a financial statement for third party users, such as suppliers and lenders, we can issue a compilation report on the financial statements. This can be issued with a full set of disclosures or without. There is a lot of flexibility with a compilation. Also, we do not need to be considered “independent” in order to issue a compilation report. Independence can be impaired when members of our firm or their family members have a financial interest or assume management responsibilities for the entity. 

Often, a lender or investor will require limited assurance from us, which is when we recommend reviewed financial statements. A review requires us to be independent and must include a full set of financial statements with all required disclosures. When we perform a review of an entity’s financial statements, we perform analytical procedures, including comparison to budgets, comparisons to historical financial statements, and analysis of financial ratios. We also make inquiries of management. These procedures provide the users of the financial statements with a higher level of assurance. 

Finally, there are many times when an audit is required. This includes not-for-profit organizations, required to attach audited financial statements to their state charitable registrations, employee benefit plans required to attach an audit to their annual filing with the U.S. Department of Labor and entities with outside investors or lenders who require a higher level of assurance. An audit includes the requirements for a review, but also requires us to assess fraud and internal control risks and to corroborate the responses to inquiries by management. Procedures used in an audit include confirmation with banks, customers and suppliers, vouching transactions to supporting documentation, and review of subsequent transactions. 

At Lear & Pannepacker, we strive to tailor each engagement to the needs of the users, while minimizing the cost. Many times, a lender will agree to a downgrade in the level of assurance required after we advocate for our clients. Give us a call and we can help you better understand your options!

Anita DeCillis

Anita DeCillis

Biographical Information:

Anita, an Administrative Assistant, has been with the firm since 2019. Anita divides her time between collating tax returns and financial statements, greeting clients, answering phones, and scheduling appointments. She also manages the calendar for team members and provides general administrative support for all staff members.

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Thomas Saulle

Thomas Saulle

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Thomas, a Semi-Senior Accountant, joined the firm in 2019. His main areas of focus include the preparation of federal and state income tax returns for individuals and organizations, compilations and other financial statement preparation, as well as support tasks specific to public accounting.

Prior to joining Lear & Pannepacker, Thomas worked a Financial Analyst Intern position at Johnson & Johnson Information Technologies in Raritan, NJ providing various forecasting models for multiple sectors within the organization.

Thomas is a young individual looking to maximize his business acumen in the areas of tax services and audit & assurance. He will be seeking his CPA License in the State of New Jersey sometime in the future.

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Steven G. Sciortino Jr.

Steven G. Sciortino Jr., CPA, MAcc

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Steve, a Partner, joined the firm in 2006.  He is an acclaimed leader and entrepreneur in the accounting field with a tremendous track record of working with businesses across various industries, high net worth individuals, private Clubs and nonprofit entities.  Steve has extensive experience in tax planning and compliance, attestation work, and consulting in areas such as accounting system design, budgeting, cash flow management, strategic planning and on-site CFO services.

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Soroj Hansraj

Soroj Hansraj

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Soroj, a Bookkeeper & Administrative Assistant​​, joined the firm in 2015.  Her areas of focus include general bookkeeping for small businesses, payroll and sales tax preparation and client relations.  Soroj joins us from the recent merger with Semmel Management Consultants, Inc. Soroj was with Semmel Management for 25+ years and is the Administrator of our New York office.

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Salvatore M. Bivona

Salvatore M. Bivona, CPA, MAcc

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Salvatore, a Senior Accountant, has been with the firm since 2017. Prior to joining Lear & Pannepacker, Sal gained valuable experience working for one of the Big Four accounting firms where he provided tax services for multiple Fortune 500 Companies.

Sal works primarily on tax preparation and tax planning for individuals and businesses. He has assisted clients across various industries, such as real estate, telecommunications, manufacturing, and professional service companies. Sal also provides audit, review, and compilation services for non-public companies, not-for-profit organizations, and employee benefit plans. He also provides formation and registration services for entrepreneurs starting a new business.

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Ryan Fitzgerald

Ryan Fitzgerald

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Ryan, a Senior Accountant, joined the firm in 2016. He graduated from Rider University with a bachelor’s degree in Accounting, and currently is pursuing his Certified Public Accountant license in the State of New Jersey. His areas of focus include audits, reviews, attestation and compilation engagements for non-public companies, not-for-profit organizations, and employee benefit plans. Ryan also specializes in data extraction and analysis and is well versed in accounting software packages. Ryan joined Lear & Pannepacker, LLP in 2016 after beginning his career with a large, regional CPA firm.

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Pavan Rajput

Pavan Rajput, MBA

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Pavan Rajput, a Supervisor, has been with the firm since 2005.  Pavan works with a variety of closely held businesses and multiple international corporations.  He also contributes to the development of our entry-level staff and participates in the firm’s intern and staff training.  His areas of focus and expertise are with individual and corporate tax returns, tax/strategic planning, general accounting for small businesses and financial planning services.  

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Nathan Semmel

Nathan Semmel, CPA, MAcc

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Nathan Semmel, International Tax Supervisor, has been with the firm since 2015. Nathan’s areas of focus include the preparation of federal and state income tax returns for corporate, partnership, and individual clients, as well as individual business audit examinations for federal and state income taxes and civil penalties (CIVPEN).

Nathan also works with U.S. citizens conducting business abroad and foreign citizens conducting business in the United States, preparing 1040s for expatriates including Form 2555, as well as 1040NR for nonresidents and dual citizens. He has prepared filings in relation to the Streamlined Domestic Offshore Procedure, Streamlined Foreign Offshore Procedure, and Delinquent International Information Return Submission Procedures. Nathan also deals with foreign gifts and inheritances, foreign trust distributions, and foreign trust ownerships, preparing forms 3520 and 3520-A. He prepares Foreign Bank Account Reports (FBAR), and Form 8938 filings regarding foreign accounts and assets that require reporting, as well as forms 5471 and 5472 regarding ownership of foreign companies and foreign owned U.S. corporations. Nathan also has experience preparing Passive Foreign Investment Company (PFIC) filings and ensuring proper election has been made for passive foreign investments, which can include ownership of foreign mutual funds.

His working experience with other foreign issues is not limited to the above.

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