Using Retirement Contributions to Maximize Your 199A Deduction Before it Disappears

by Prof. Robert Bloink and Prof. William H. Byrnes

The 2017 tax reform legislation fundamentally changed the tax treatment of pass-through business entities through the enactment of Section 199A.  The 20% deduction for qualified business income (QBI) can greatly reduce tax liability for the owners of partnerships, S corps and other pass-through entities.  That said, the deduction isn’t available to all businesses.  Income restrictions serve to limit the availability of the deduction for higher-earning pass-throughs who are classified as service businesses.  There are steps that taxpayers can take to maximize the value of the QBI deduction—and many taxpayers may be forgetting that Section 199A is set to expire entirely after 2025 if Congress does not legislate an extension.  Taxpayers who are interested in maximizing the QBI deduction while simultaneously funding their retirements should act quickly to take advantage of this potentially limited deduction.

Limitations on the QBI Deduction

As clients now well know, the 2017 tax reform legislation allows pass-through entities to deduct 20 percent of “qualified business income” (QBI) (in 2018 to 2025).  Despite this, entities that are classified as “service businesses” (including attorneys, accountants, doctors, financial advisors and certain other service-related professionals) are not entitled to the full benefit of the deduction if the business owner’s taxable income exceeds certain threshold amounts.