New Section 199A Deduction Available to S Corporation Shareholders
The new tax plan signed by President Trump in December includes a special deduction under Section 199A for S C Corporation shareholders as well as other business owners. This deduction of up to 20% of business income helps to bring the tax rate in effect for S Corporations, partnerships, and other small businesses closer in line with the new 21% C Corporation tax rate. The deduction seems straight forward at first glance, but will result in additional complexities for S Corporations and their shareholders.
Shareholders will continue to receive a Schedule K-1 (though it will likely contain some additional information that hasn’t been reported in the past) and will still report their ordinary business income on Schedule E of their personal tax return. Shareholders will then need to compute their Section 199A deduction, which will reduce their taxable income (rather than adjusted gross income). This deduction is available to taxpayers even if they claim the standard deduction.
The deduction is generally 20% of the taxpayer’s qualified business. Qualified business income includes income, deductions, and gains or losses from a trade or business but excludes certain items including capital gains and dividends.
Shareholders whose taxable income exceeds a threshold amount of $157,500 if single or $315,000 if married filing jointly may be subject to limitations based on their share of the W-2 wages of the business and the adjusted basis in the business’s assets. There are also additional limitations that can apply if the shareholder owns multiple businesses.
The wages paid by financial institutions compared to their taxable income tend to be relatively high because of the labor intensive nature of the business. So in many cases, the wage limit may not cause issues for financial institution shareholders when calculating the Section 199A deduction, but every institution and every shareholder is unique.
The CLA financial institutions team is here to help you navigate the new tax law and determine how best to position your financial institution given these sweeping changes. Please contact a member of our team to discuss these matters further.
Amanda Garnett is a principal in the financial institutions practice of CliftonLarsonAllen (CLA) from Peoria, Illinois. She currently leads the firm’s Midwest financial institution tax team and serves institutions ranging in size from $15 million to $3.5 billion in total assets. In addition to tax compliance, Amanda assists clients in the areas of tax consulting, mergers and acquisitions, and regulatory reporting. She also routinely teaches courses for banking associations across the country.
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