Do You Qualify for the Section 199A Tax Deduction?

With the Tax Cuts and Jobs Act of 2017 (TCJA) Congress enacted the Section 199A deduction that is available for tax years beginning after December 31, 2017. It is set to expire for tax years beginning after December 31, 2025. 

Individuals, trusts and estates with qualified business income, qualified real estate investment trust (REIT) dividends or qualified publicly traded partnership (PTP) income may qualify for the deduction.

Many individual business owners may be eligible for a 20% deduction of qualified business income (QBI). Sole proprietors and flow-through entity owners also qualify. A taxpayer must consider a myriad of definitions, limitations and all relevant rules in determining the Section 199A deduction in taxable income.  QBI must be effectively connected with the conduct of a US trade or business (defined in IRC Section 864 (c)).

For taxpayers with cross-border businesses, it’s necessary to determine if they have trade or business income.  Generally, a “trade or business” is defined in the context of IRC Section 162 but many activities are left with uncertainty. US individual business owners are subject to U.S. tax on their worldwide income. After meeting the definition of trade or business the taxpayer then must determine if income is US or foreign sourced. Foreign sourced trade or business income will not meet the criteria for Section 199A deduction since it is limited to income that is effectively connected to a U.S. trade or business. Presumably other US tax provisions will provide relief for double taxation on foreign source taxed income. 

The Section 199A deduction is available to US business owners that operate domestically as well as those operating across borders. Multi-national business owners should combine the benefits from the Section 199A deduction along with other tax mitigating provisions to achieve the most efficient tax planning.

To determine if you qualify for the Section 199A deduction contact the international tax advisors at Moore Stephens Emerson GmbH. Thank you.