The Section 199A small business deduction was recently introduced by the IRS to give small business owners a significant tax break if their income levels are below a certain threshold ($315,000.00 for married couples and $157,500 for an individual). However, many small business owners may be unable to benefit from this new legislation.
The new rule comes with requirements that could be difficult for many small businesses to meet, and the IRS has yet to provide more guidance as to how to legally meet these requirements. For this reason, many CPAs are recommending to their clients that they pass on the deduction at this time.
The Section 199A Deduction sounds appealing because it can reduce your income taxes by up to 20%, but you may have to set up a new entity to do so since the deduction is really only intended for Sole Proprietorships and S-Corporations.
The legal and practical complications of setting up a new entity to benefit from the deduction may not be worth it, and there is no guarantee that the IRS will not see your new business entity as an extension of your existing business.
Other Ways to Reduce Your Taxable Business Income:
1. Charitable Donations.
If you make donations to a registered charity, you can get donation receipts that can be used as a legitimate way to decrease your taxable income.
2. Retirement Contributions.
If you have a retirement savings plan of some kind, make sure that you record all of your contributions so that you can report these during tax season.
3. Business Expenses.
The most common and easiest way to reduce your taxable income is by deducting business expenses. The majority of goods or services that you purchase for your business can be deducted from your income.
You can learn more about the new Section 199A Deduction on the IRS website.