TAX TIPS: 199A Business Tax Reduction Strategies By Dec. 31, 2022
The Tax Cuts and Jobs Act gave many taxpayers a 20 percent Section 199A deduction based on your defined qualified business income (“QBI”) from a qualified trade or business operated in the USA as a sole proprietor or through a pass-through entity (i.e., S-Corp. and Partnerships) and other specific qualified QBI sources. In general, total taxable income in 2023 tax year must be under $364,200 for joint 1040 filers and $182,100 for all others before phase-in limits start. Reducing your business income with tax planning also reduces your 199A deduction because the twenty percent deduction comes from your QBI and as one reduces so does the other. This leads to some strategies you can use to maximize your section 199A deductions.
Below are three strategies to reduce your taxable income so that you qualify for a higher 199A deduction (i.e., reporting taxable income under the QBI thresholds):
- Harvesting Capital Losses- Taxable income less the capital gains is what sets the upper limit of your deduction so if those capital gains are working against your deduction you can harvest losses to offset the gains.
- Charitable Contributions- Who doesn’t like charity? Charitable contributions increase your itemized deductions and reduce your taxable income. Some tips for this are to donate appreciated stock or to prepay your planned 2023 donations.
- Buy Assets- If you buy an asset before December 31, 2022, you can use 100 percent bonus depreciation with Section 179 (2023 max Section 179 deduction is $1,160,000) expensing to write off the entire cost of most purchased assets. This reduces your taxable income but can also increase your section 199A deduction as well if your calculation includes unadjusted basis in qualified property (UBIA)
If you would like to learn more or to set up a consultation call Marlies Y Hendricks CPA PLLC at either 716-694-3500 or 910-769-8730.
The above information is of a general nature only and should not be relied upon for specific situations.