Market Law: Part II: Clarity of Section 199A

It’s tax time, and for many New Hampshire business owners, the annual 20% federal income tax deduction potentially available to them under Section 199A of the Internal Revenue Code will be extremely important. Hence this third of three consecutive columns on the section.

For non-taxers: for the reasonably foreseeable future, I promise not to pay any more taxes! However, I hope this column will be helpful to federal tax practitioners, if only as a review of what they already know about Section 199A.

For clarity, and in case anyone wants to discuss this column with me or others, I will number its paragraphs.

1) If the taxable income you report for 2022 is less than your Section 199A “threshold amount”, your Section 199A deduction will be determined under Section 199A(b)(2)(A) as 20% of your “qualifying business income” — an easy calculation. (The term “high pay” is my term, not the 199A term.) For most businesses, “qualifying business income” simply means their net business income, i.e. their gross income less any federal tax deductions. The Section 199A threshold amount for persons filing jointly is $340,100; for separate filers, it is $170,050. (The above “20%” is subject to a rather technical general deduction for all taxpayers which I won’t discuss here.)

2) If you earn a lot of money, i.e. your taxable income is at or above the Section 199A threshold, your Section 199A deduction on your share of your business income will be determined under Sections 199A(b)(2)(A) and (B). Under these provisions, and if your business does not own “qualified property”, your deduction will be the lesser of: a) 20% of your net business income; and b) 50% of the total wages your company pays to its employees.

3) Under Section 199A(b)(6), “eligible property” means, in substance, real estate, equipment and other tangible property belonging to a trade or business, used by it in its activity and deductible under section 167 of the IRC.

4) If your LLC elects to be an S corporation for federal tax purposes, the above aggregate compensation will include its compensation for yourself if you are an employee of your business. For any LLC in which one or more owners are also employees, an election under Subchapter S will sometimes make a lot of sense.

5) To calculate your “high income” deduction under sections 199A(b)(2)(A) and (B), start with the following simple algebraic formula: 0.2(XY) = 0.5Y, where X equals your company’s gross income and Y equals the overall salaries above.

6) Once you have done this calculation, if the left side of your calculation exceeds the right side, you will need to increase the amount on the right side so that the right side is equal to or greater than the left side. This is because under Section 199A(b)(3)(B), if the left side exceeds the right, you will have to reduce your Section 199A deduction under the complex statutory formula of Section 199A. (b)(3)(B)(ii). According to this formula, you need to multiply the excess from the left side over the right side by a fraction where the numerator is your taxable income and the denominator is your threshold amount, then you need to subtract the resulting number from your deduction under the left side .

7) What happens if your business has property that falls under Section 167? If so, then for 2022 your deduction will be the lesser of 20% of your net business income and the greater of (i) 50% of your business wages and (ii) 25% of total wages of your business plus 2.5% of the “unadjusted immediately after acquisition basis” of all qualifying property owned and used by your business in 2022 (before, of course, any required application of Section 199A(b) (3)(B)). To calculate your Section 199A deduction in this situation, you will need to adjust the algebraic formula above; but anyone with a basic knowledge of algebra and section 199A will find the adjustment easy.

8) If your business is a Section 199A(d)(2) “specified trade or service business” (an “SSTB”), you may need to reduce your Section 199A “high income” deduction using the formula set forth in Section 199A. (d)(3). SSTBs include all types of businesses normally described as professional businesses – for example, accountants, lawyers and doctors – as well as some types of investment businesses, but excluding architects and engineers.

9) In addition, you must use special rules to calculate your deduction under Section 199A if your business is agricultural or horticultural.

10) One final point: Tax scholars have described Section 199A as the most complex of all the dozens of major amendments made to the Internal Revenue Code in 2017. So while I believe the discussion here above section is accurate, your own deduction under Section 199A may need to account for exceptions not listed above. So don’t rely solely on this column to calculate this deduction; rely on your Section 199A deduction as calculated by a tax preparer with substantial Section 199A expertise.

If any readers would like a version of this column and the other two columns I recently published on Section 199A in a single Word document, let me know and I will email that document to you.

John Cunningham is an attorney licensed to practice law in New Hampshire and Massachusetts. He is legal counsel for the law firm McLane Middleton, PA. Contact him at 856-7172 or [email protected]. His website is To access all of his Law in the Marketplace columns, visit

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