Code Sec. 199A provides a deduction to non-corporate taxpayers of up to 20 percent of the taxpayer’s qualified business income from each taxpayer’s qualified trades or businesses, including those operated through a partnership, S corporation, or sole proprietorship. Individuals, estates, and trusts can also deduct 20 percent of aggregate qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership income. However, the deduction is limited to 50 percent of the qualified W-2 wages paid by the taxpayer during the tax year.

However, for some higher-income taxpayers, the deduction might be based on the W-2 wages paid by the pass-through business. Some patrons of agricultural cooperatives may also have to reduce their deduction by a portion of their W-2 wages.

Taxpayers may use one of three methods to calculate W-2 wages for purposes of the Code Sec. 199A:

  • Unmodified box method,
  • Modified box 1 method, or
  • Tracking wages method.

The unmodified box method is the simplest, but the modified box 1 and tracking wages methods are more accurate.

Short tax years and determining wages. A taxpayer’s W-2 wages in a short tax year as determined under the tracking wages method. Taxpayers with a short tax year containing, but not ending on December 31, can include all wages actually or constructively paid during the short taxable year.

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Please call our office to discuss these new rules. We can review your current business operations and organization to make sure you are taking full advantage of the Code Sec. 199A deduction.