Section 199A Deduction refers to a provision of the Tax Cuts and Jobs Act that allows eligible businesses to deduct up to 20% of their qualified business income (QBI) from pass-through entities, such as sole proprietorships, partnerships, S corporations, and some trusts and estates.
This deduction is aimed at reducing the overall tax burden for small business owners and is subject to specific thresholds and limitations based on the taxpayer’s income level and the nature of the business activities. For instance, higher-income taxpayers may face restrictions if their business is considered a "specified service trade or business" (SSTB), which includes fields like healthcare, law, and consulting.
To qualify, taxpayers must calculate their QBI, which is generally the net income from qualified businesses, excluding capital gains, dividend income, and interest income. Additionally, the deduction is limited to the greater of 50% of the W-2 wages paid by the business or 25% of the W-2 wages plus 2.5% of the unadjusted basis of qualified property.
Overall, the Section 199A Deduction provides significant tax incentives for eligible businesses but requires careful consideration of the specific rules and qualifications involved.
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