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Section 199A Specified Service Business Comparison Part 2

Article ID: 351
Last updated: 24 Nov, 2018
Revision: 3
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By Jason Watson ()
Posted November 23, 2018

Big shot surgeon compared to the lowly goat herder (non-specified service trade).

Surgeon

Goat Herder

ln

No S

S Corp

No S

S Corp

1

Business Income

600,000

600,000

600,000

600,000

2

  less W-2 Wages inc. SEHI, HSA, etc.

0

210,000

0

210,000

3

  less Payroll Taxes

0

11,024

0

11,024

4

Net Business Income Section 199A

600,000

378,976

600,000

378,976

5

Adjustments to 1040 / NBI

6

  less Social Security Tax

7,979

0

7,979

0

7

  less Medicare Tax

8,034

0

8,034

0

8

  less SEHI, HSA, etc.

0

0

0

0

9

Other Taxable Income

0

0

0

0

10

Adjusted Gross Income*

583,986

588,976

583,986

588,976

11

Itemized / Std Deductions

50,000

50,000

50,000

50,000

12

Taxable Income Before Section 199A

533,986

538,976

533,986

538,976

-

13

Section 199A Net Biz Income

120,000

75,795

120,000

75,795

14

Section 199A W-2 Wage Limit

0

105,000

0

105,000

15

Section 199A Taxable Income Limit

106,797

107,795

106,797

107,795

-

16

Section 199A Benefit

0

0

0

75,795

17

Marginal Income Tax Rate

37%

37%

37%

37%

18

Income Tax Benefit from Section 199A

0

0

0

-28,044

19

  plus Self-Employment Tax

32,028

0

32,028

0

20

  plus Tax on Line 12 Delta (above)

0

1,846

0

1,846

21

  plus Payroll Tax

0

22,049

0

22,049

22

Net Tax After Section 199A Benefit

32,028

23,895

32,028

-4,149

-

23

Net S Corp Benefit $

8,133

36,177

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

Well, that’s a lie. There are only two. First, specified service trades or businesses got hosed in the Section 199A calculation. Being a goat herder raking in $600,000 as compared to a surgeon gets a $36,000 bump in tax benefit. If you give it careful consideration, how are these two businesses different? While we are being a bit facetious here, at the same time two business owners are experiencing different tax worlds based on titles. The goat herder could be operating with a staff and not relying his or her reputation or skill.

Second takeaway, although specified service industries such as accountants, doctors, attorneys, etc., are not enjoying the Section 199A deduction benefit, it still pays to be an S corporation. There is still a savings of $8,133 by being an S Corp for the big shot surgeon. You have an obligation as a citizen to reduce your taxes to the minimum allowed.

Please review our previous chapter for more information and expanded definitions of specified service trade or business.

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Section 199A Specified Service Business Comparison Part 1       Section 199A Phaseout