Watson CPA Group - Knowledgebase

Knowledgebase

Section 199A Specified Service Business Comparison Part 1

Article ID: 350
Last updated: 24 Nov, 2018
Revision: 3
print  Print
share  Share
comment  Add comment
Views: 0
Comments: 0

By Jason Watson ()
Posted November 23, 2018

Same online retailer but compared to an attorney (SSTB). Yuck!

Retailer

Attorney

ln

No S

S Corp

No S

S Corp

1

Business Income

250,000

250,000

250,000

250,000

2

  less W-2 Wages inc. SEHI, HSA, etc.

0

87,500

0

87,500

3

  less Payroll Taxes

0

6,694

0

6,694

4

Net Business Income Section 199A

250,000

155,806

250,000

155,806

5

Adjustments to 1040 / NBI

6

  less Social Security Tax

7,979

0

7,979

0

7

  less Medicare Tax

3,348

0

3,348

0

8

  less SEHI, HSA, etc.

0

0

0

0

9

Other Taxable Income

0

0

0

0

10

Adjusted Gross Income*

238,673

243,306

238,673

243,306

11

Itemized / Std Deductions

12,000

12,000

12,000

12,000

12

Taxable Income Before Section 199A

226,673

231,306

226,673

231,306

-

13

Section 199A Net Biz Income

50,000

31,161

50,000

31,161

14

Section 199A W-2 Wage Limit

0

43,750

0

43,750

15

Section 199A Taxable Income Limit

45,335

46,261

45,335

46,261

-

16

Section 199A Benefit

0

31,161

0

0

17

Marginal Income Tax Rate

35%

35%

35%

35%

18

Income Tax Benefit from Section 199A

0

-10,906

0

0

19

  plus Self-Employment Tax

22,654

0

22,654

0

20

  plus Tax on Line 12 Delta (above)

0

1,622

0

1,622

21

  plus Payroll Tax

0

13,388

0

13,388

22

Net Tax After Section 199A Benefit

22,654

4,103

22,654

15,009

-

23

Net S Corp Benefit $

18,551

7,645

*includes the S Corp W-2
There are several notables, takeaways and explanations-

Assumptions are $250,000 in business income prior to $87,500 in reasonable shareholder salary. Itemized deductions of $12,000 and both taxpayers are single. Same as previous example, but now we are comparing a non-specified service trade or business (online retailer) to an attorney.

Observe the differences in Line 16. Recall the Section 199A decision tree from earlier-

  • If taxable income is less than $157,500 (single) / $315,000 (married) then the 20% deduction for your pass-through entity is fully available.

  • If taxable income is greater than $157,500 / $315,000 but less than $207,500 / $415,000 then a partial deduction is available. The phase-in of the limit is linear (more explanation later).

  • If taxable income is greater than $207,500 / $415,000 then you are hosed. Sorry.

The attorney should absolutely be an S corporation and enjoy the $7,645 in tax savings. He or she simply won’t be enjoying the $18,551 savings of the online retailer. Surely the online retailer should be sued by the attorney to help equalize the balance of tax benefits and preserve the natural order. Attorneys are so proud. Same with doctors. Same with CPAs. Perhaps that we are all SSTBs. Our pride killed our deduction.

Remember that if a specified service trade or business has taxable income that is equal to or less than $157,500 for single taxpayers and $315,000 for married taxpayers, there is no phase-in of the limitations (or Section 199A phaseout). Said in another way, if the online retailer and the attorney both earned $150,000 from their respective crafts, the Section 199A savings would be identical.

Drive that point home please; an SSTB in the 24% marginal tax rate is the same as a non SSTB.

Let’s do one more! Drool… come on, it’s not that bad. No, Jason, really, it is that bad. For real.

Taxpayer's Comprehensive Guide to LLCs and S Corps : 2019 Edition
This KB article is an excerpt from our book which is available in paperback from Amazon, as an eBook for Kindle and as a PDF from ClickBank. We used to publish with iTunes and Nook, but keeping up with two different formats was brutal. You can cruise through these KB articles, click on the fancy buttons below or visit our webpage which provides more information at-

$24.95 $17.95 $12.95

www.watsoncpagroup.com/book

This article was:   Helpful | Not helpful Report an issue


Prev     Next
Section 199A 250k Comparison       Section 199A Specified Service Business Comparison Part 2