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Section 199A Specified Service Business Comparison Part 2

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

Big shot surgeon compared to the lowly goat herder (non-specified service trade).

Surgeon Goat Herder
ln No S S Corp No S S Corp
1 Business Income 600,000 600,000 600,000 600,000
2   less W-2 Wages inc. SEHI, HSA, etc. 0 210,000 0 210,000
3   less Payroll Taxes 0 11,024 0 11,024
4 Net Business Income Section 199A 600,000 378,976 600,000 378,976
5 Adjustments to 1040 / NBI
6   less Social Security Tax 7,979 0 7,979 0
7   less Medicare Tax 8,034 0 8,034 0
8   less SEHI, HSA, etc. 0 0 0 0
9 Other Taxable Income 0 0 0 0
10 Adjusted Gross Income* 583,986 588,976 583,986 588,976
11 Itemized / Std Deductions 50,000 50,000 50,000 50,000
12 Taxable Income Before Section 199A 533,986 538,976 533,986 538,976
13 Section 199A Net Biz Income 120,000 75,795 120,000 75,795
14 Section 199A W-2 Wage Limit 0 105,000 0 105,000
15 Section 199A Taxable Income Limit 106,797 107,795 106,797 107,795
16 Section 199A Benefit 0 0 0 75,795
17 Marginal Income Tax Rate 37% 37% 37% 37%
18 Income Tax Benefit from Section 199A 0 0 0 -28,044
19   plus Self-Employment Tax 32,028 0 32,028 0
20   plus Tax on Line 12 Delta (above) 0 1,846 0 1,846
21   plus Payroll Tax 0 22,049 0 22,049
22 Net Tax After Section 199A Benefit 32,028 23,895 32,028 -4,149
23 Net S Corp Benefit $ 8,133 36,177

*includes the S Corp W-2

There are several notables, takeaways and explanations-

Well, that’s a lie. There are only two. First, specified service trades or businesses got hosed in the Section 199A calculation. Being a goat herder raking in $600,000 as compared to a surgeon gets a $36,000 bump in tax benefit. If you give it careful consideration, how are these two businesses different? While we are being a bit facetious here, at the same time two business owners are experiencing different tax worlds based on titles. The goat herder could be operating with a staff and not relying his or her reputation or skill.

Second takeaway, although specified service industries such as accountants, doctors, attorneys, etc., are not enjoying the Section 199A deduction benefit, it still pays to be an S corporation. There is still a savings of $8,133 by being an S Corp for the big shot surgeon. You have an obligation as a citizen to reduce your taxes to the minimum allowed.

Please review our previous chapter for more information and expanded definitions of specified service trade or business.

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