Skip to content
  • XERO Sign In
  • Client Sign In
    • CWA Client Portal
    • Suralink Client Portal
    • eMoney Login
    • Black Diamond Login
  • Facebook
  • LinkedIn
  • Youtube
  • Instagram
  • About
    • History
    • Powering Potential
    • Our Team
  • Services
    • Financial Planning
      • Business Planning
      • Personal Planning
    • Practice Transitions
    • Wealth Management
    • Accounting Services
      • Essential Advisory Service
    • Tax Services
    • New Doctors
    • DSO Partners
  • Events
    • Annual Meeting
    • Practice Transition Seminar
    • DSO Transition Seminar
    • Upcoming Speaking Engagements
    • Book a CWA Speaker
  • Resources
    • Resources
    • New Clients
    • Podcast
      • Accumulating Wealth Podcast
      • Dental Partnerships Podcast
    • Investment Updates
    • Educational Videos
    • 3to1 Foundation
  • Blog
  • Contact
  • XERO Sign In
  • Client Sign In
    • CWA Client Portal
    • Suralink Client Portal
    • eMoney Login
    • Black Diamond Login
  • Facebook
  • LinkedIn
  • Youtube
  • Instagram
  • Careers
  • References
  • Privacy
  • Disclosures
  • Terms of Use
  • Events
  • About
    • History
    • Powering Potential
    • Our Team
  • Services
    • Financial Planning
      • Business Planning
      • Personal Planning
    • Practice Transitions
    • Wealth Management
    • Accounting Services
      • Essential Advisory Service
    • Tax Services
    • New Doctors
    • DSO Partners
  • Events
    • Annual Meeting
    • Practice Transition Seminar
    • DSO Transition Seminar
    • Upcoming Speaking Engagements
    • Book a CWA Speaker
  • Resources
    • Resources
    • New Clients
    • Podcast
      • Accumulating Wealth Podcast
      • Dental Partnerships Podcast
    • Investment Updates
    • Educational Videos
    • 3to1 Foundation
  • Blog
  • Contact

Tax Law September Update: Changes to 199A Deduction

  • by CWA
  • •    September 10, 2018
SHARE

Updated 10/5/2020 to reflect 2020 taxable income limits. 

In early August, the IRS issued proposed regulations on the Tax Cut and Job Act. The regulations provide supplemental guidance on how the IRS will interpret and enforce the internal revenue code.

Section 199A Deduction – The 20% pass-through deduction

The most complex and discussed part of the tax law is Section 199A, the deduction for qualified business Income (QBI). The regulations issued this past month provide some much-needed clarity on how this deduction will or will not apply.

As a review, the law allows a taxpayer engaged in a “qualified trade or business” to claim the 199A deduction with the following two exceptions:

1. The taxpayer is in the trade or business of performing services as an employee. This eliminates a W-2 employee from claiming the deduction against their wages.
2. If the business is a specified service trade or business (SSTB).

The second exception is the painful one for health professionals. Dentists and other similar healthcare professionals who provide services directly to a patient are specifically listed in the law and regulations as a SSTB. A taxpayer engaged in a SSTB will have their 199A deduction calculated as follows for 2020:

– Taxable income is $326,600 or less you will receive the full 20% deduction on your qualified business income.
– Taxable income of $326,600 to $426,600 will receive some percentage of the 199A deduction and phase out at $415,000.
– Taxable income of $426,600 or more will receive no deduction.

The moment the law was finalized, attorneys and CPAs scrambled to find ways to remove income from a taxpayer in a SSTB with income over $426,600 in order to create income from a qualified business and qualify for a 199A deduction. CWA recommended at that time to be cautious and wait for guidance from the IRS before incurring expenses to create new entities in the hope to qualify for a 199A deduction.

This August, the regulations put a big “NO” on the idea of bifurcating income of a SSTB. The regulations state that a SSTB includes any trade or business that provides 80% or more of its property or services to a SSTB, if the two businesses share 50% or more common ownership.

Let’s look at an example: Partners A, B & C practice dentistry and have three locations. A, B & C create a new business to provide all non-clinical services to their dental practice locations. Even though the new business is not a SSTB it will be treated as such since it is providing over 80% of services to a SSTB and the common ownership is 50%.

This same example applies to rental income from a building. While the rental of real property is not considered a SSTB, if the building rent(s) are more than 80% to a SSTB and the common ownership is 50%, the net rental income doesn’t qualify for a 199A deduction. If a portion of the building is rented to third parties, the net income from the third party would qualify for the deduction, but the net rental income from the SSTB would not qualify.

These examples effectively squash the idea of paying the highest fair value rent for a doctor for his wholly owned dental building or creating a separate management company (like a DSO) still owned by the doctor and qualifying for the 199A deduction.

While there may be some other strategic tax planning ideas based on creating common ownership less than 50% for a DSO structure, it will not be easy due to the internal revenue code attribution rules for family members. Therefore, any new strategies will need to be very specific since this would require selling ownership to a third party.

At CWA, we are focused with our clients on lowering their taxable income to help qualify for the 199A deduction through:

– Maximizing or increasing profit sharing or cash balance plan contributions. This can lower taxable income by over $100,000.
– Reviewing conservation easement strategies. This can lower taxable income by over $100,000. In addition, charitable contributions are no longer subject to a phase out.
– Employing your children, documenting their work and paying the highest possible salary without tax. This can lower taxable income by up to $12,000 per child.
– Maximizing deprecation through cost segregations. Depending on the size of your project, this can have a significant impact on your taxes.
– Making sure you are accounting for meals, holiday parties and entertainment expenses to maximize deductions.

There are still many planning opportunities for the dental professional under the new tax law. Please reach to your CWA planner with any questions, or cainwatters.com/contact.

Cain Watters is a Registered Investment Advisor.  Cain Watters only conducts business in states where it is properly registered or is excluded from registration requirements. Registration is not an endorsement of the firm by securities regulators and does not mean the adviser has achieved a specific level of skill or ability.  Request Form ADV Part 2A for a complete description of Cain Watters investment advisory services. Diversification does not ensure a profit and may not protect against loss in declining markets.  Past performance is not an indicator of future results. 

LIKE THIS ARTICLE? HERE ARE OTHERS YOU MIGHT LIKE.

Meals & Entertainment Tax Deductions for 2025

April 4, 2025

FinCen BOI Reporting Updates

March 26, 2025

IRS Updates Contribution Limits for 2025

January 17, 2025

Year-End Tax Planning Considerations for 2024

October 21, 2024
GET THE LATEST NEWS AND INFORMATION IMPACTING YOUR PRACTICE.
Email will be used in accordance with our Privacy Policy

CATEGORIES

All
Categories
  • Accounting (8)
  • Accumulating Wealth Podcast (191)
  • Annual Meeting (14)
  • Digital News Feature (153)
  • Financial Planning (134)
  • Inside CWA (28)
  • Investing (51)
  • Knowledge & Know-How (78)
  • News (83)
  • PR/Marketing/Social Media (4)
  • Practice Management (92)
  • Practice Transition (3)
  • Seminars & Events (12)
  • Tax News (95)
  • Technology (5)
  • The 3to1 Foundation (12)
  • The Advisors' Shelf (11)
  • Videos (32)

TOP POSTS

Can You Afford an Associate? – Ep. 238

June 17, 2025

Time Is Your Biggest Asset – Ep. 237

June 10, 2025

Four Ways to Increase Profitability in Your Practice

June 6, 2025

Investment Updates

June 5, 2025

Can You Afford an Associate? – Ep. 238

June 17, 2025

Time Is Your Biggest Asset – Ep. 237

June 10, 2025

Four Ways to Increase Profitability in Your Practice

June 6, 2025

Investment Updates

June 5, 2025
CONNECT WITH US
  • About
    • History
    • Powering Potential
    • Our Team
  • Services
    • Financial Planning
      • Business Planning
      • Personal Planning
    • Practice Transitions
    • Wealth Management
    • Accounting Services
      • Essential Advisory Service
    • Tax Services
    • New Doctors
    • DSO Partners
  • Events
    • Annual Meeting
    • Practice Transition Seminar
    • DSO Transition Seminar
    • Upcoming Speaking Engagements
    • Book a CWA Speaker
  • Resources
    • Resources
    • New Clients
    • Podcast
      • Accumulating Wealth Podcast
      • Dental Partnerships Podcast
    • Investment Updates
    • Educational Videos
    • 3to1 Foundation
  • Blog
  • Contact
  • Careers
  • References
  • Privacy
  • Disclosures
  • Terms of Use
  • Events
Cain Watters & Associates 17 Cowboys Way, Suite 300 Frisco