Practical Considerations Regarding Section 199A of the New US Tax Law

Tax | Jerry Eitel | Apr 18, 2019

The Tax Cuts and Jobs Act passed by the US Congress on 17 December 2017, includes Section 199A, a provision that can afford pass-through businesses a 20% deduction of:

  • Qualified business income (QBI) from a domestic qualified trade or business (QTOB) operated as a sole proprietorship, partnership, S corporation, trust or estate;
  • Combined qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income. This complex law has many technical points too numerous to cover here. However, to illustrate some practical considerations that apply when determining how this law may affect your business, the following are two real-life examples and an important accounting consideration.

Example One

Steve operates an online retailer S corporation which pays USD 100,000 in W-2 wages and earns USD 400,000 in net qualified business income. Because he is considered a “high earner” by exceeding the income limits, his deduction is limited to 50% of the W-2 or USD 50,000 which is less than 20% of USD 400,000.

Example Two

William operates as a sole proprietor and earns USD 500,000 but does not pay any W-2 wages. His deduction is the lesser of 50% of the W-2 wages (or USD 0 in this example), or 20% of the USD 500,000. If he paid out USD 200,000 in employee wages and had USD 300,000 in net business income, his Section 199A deduction would be the lesser of 50% of USD 200,000 or 20% of USD 300,000. In other words, he would deduct USD 60,000 (USD 60,000 is less than USD 100,000).

Accounting Consideration

To maximize the credit, one practical consideration with an “S” Corp with no employees other than the shareholders is the ratio of shareholder wages to net income before shareholder wages. The magic number is 2:7. Using this ratio can potentially bring the effective federal tax rate down from 37% to 30%.

As stated, Section 199A of the new US tax law is complex and warrants careful study by a business’ accounting professionals to confirm eligibility and derive the maximum benefit.


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