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Section 199A 250k Comparison

PostedOctober 20, 2021

By Jason Watson, CPA
Posted Wednesday, October 20, 2021

Same online retailer (not a specified service business) showing single versus married.

Single Married
ln No S S Corp No S S Corp
1 Business Income 250,000 250,000 250,000 250,000
2   less W-2 Wages inc. SEHI, HSA, etc. 0 87,500 0 87,500
3   less Payroll Taxes 0 6,694 0 6,694
4 Net Business Income Section 199A 250,000 155,806 250,000 155,806
5 Adjustments to 1040 / NBI
6   less Social Security Tax 7,979 0 7,979 0
7   less Medicare Tax 3,348 0 3,348 0
8   less SEHI, HSA, etc. 0 0 0 0
9 Other Taxable Income 0 0 0 0
10 Adjusted Gross Income* 238,673 243,306 238,673 243,306
11 Itemized / Std Deductions 12,000 12,000 24,000 24,000
12 Taxable Income Before Section 199A 226,673 231,306 214,673 219,306
13 Section 199A Net Biz Income 50,000 31,161 50,000 31,161
14 Section 199A W-2 Wage Limit 0 43,750 0 43,750
15 Section 199A Taxable Income Limit 45,335 46,261 42,935 43,861
16 Section 199A Benefit 0 31,161 42,935 31,161
17 Marginal Income Tax Rate 35% 35% 24% 24%
18 Income Tax Benefit from Section 199A 0 -10,906 -10,304 -7,479
19   plus Self-Employment Tax 22,654 0 22,654 0
20   plus Tax on Line 12 Delta (above) 0 1,622 0 1,112
21   plus Payroll Tax 0 13,388 0 13,388
22 Net Tax After Section 199A Benefit 22,654 4,103 12,350 7,021
23 Net S Corp Benefit $ 18,551 5,329

*includes the S Corp W-2

There are several notables, takeaways and explanations-

Assumptions are $250,000 in business income prior to $87,500 in reasonable shareholder salary. Itemized deductions are $12,000 as a single taxpayer and $24,000 as a married taxpayer.

Note the spreads in Section 199A deduction benefit on Line 16 and the subsequent income tax benefit on Line 18. In the scenario where the taxpayer is single, he or she is phased out of Section 199A deduction because of income and subsequent W-2 limitations (Line 14).

The example is used to show the limitations of Section 199A due to income based on marital status. However, note that by electing S Corp tax status the Section 199A benefit is identical (Line 16). The difference then becomes the income tax benefit of this deduction which is a factor of marginal tax rates (Line 17).

For couples who are not married, there might be a reason to be legally married without altering your relationship definition just to grab some additional Section 199A benefit. Vegas baby!

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