Remember to consider your Section 199A deduction in your year-end tax planning.
If you don’t, you could end up with a big fat $0 for your deduction amount. We’ll review three year-end moves that (a) reduce your income taxes and (b) boost your Section 199A deduction at the same time.
First Things First
If your taxable income is above $163,300 (or $326,600 on a joint return), then your type of business, wages paid, and property can reduce and/or eliminate your Section 199A tax deduction.
If your deduction amount is less than 20 percent of your qualified business income (QBI), then consider using one or more of the strategies described below to increase your Section 199A deduction.
Strategy 1: Harvest Capital Losses
Capital gains add to your taxable income, which is the income that
- determines your eligibility for the Section 199A tax deduction,
- sets the upper limit (ceiling) on the amount of your Section 199A tax deduction, and
- establishes when you need wages and or property to obtain your maximum deductions.
If the capital gains are hurting your Section 199A deduction, you have time before the end of the year to harvest capital losses to offset those harmful gains.
Strategy 2: Make Charitable Contributions
Since the Section 199A deduction uses taxable income for its thresholds, you can use itemized deductions to reduce and/or eliminate threshold problems and increase your Section 199A deduction.
Charitable contribution deductions are the easiest way to increase your itemized deductions before the end of the year (assuming you already itemize).
Strategy 3: Buy Business Assets
Thanks to 100 percent bonus depreciation and Section 179 expensing, you can write off the entire cost of most assets you buy and place in service before December 31, 2020.
This can help your Section 199A deduction in two ways:
- The big asset purchase and write-off can reduce your taxable income and increase your Section 199A deduction when it can get your taxable income under the threshold.
- The big asset purchase and write-off can contribute to an increased Section 199A deduction if your Section 199A deduction currently uses the calculation that includes the 2.5 percent of unadjusted basis in your business’s qualified property. In this scenario, your asset purchases increase your qualified property, which in turn increases the deduction you already depend on.
If your taxable income is over $163,300 (or $326,600 on a joint return), you could face a reduced or eliminated Section 199A deduction.
In such cases, consider using one or more of the three strategies described in this article to reduce your taxable income and increase your Section 199A deduction. The three strategies are:
- Harvest capital losses if you have capital gain income that’s causing the trouble.
- Make charitable contributions to increase your itemized deductions and reduce your taxable income—and consider donating appreciated long-term-gain stock to come out even better.
- Buy and place in service before midnight on December 31, 2020, business assets that you can expense 100 percent to lower your taxable income. (This also lowers your QBI, but if you need it to gain the Section 199 deduction, it’s a good strategy..)