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If you operate your agency as a pass-through entity, (proprietorship, partnership, or S-corporation), the profits of that business can generate you a big Section 199A tax deduction.

Agency – No-Problem Businesses

You qualify for the Section 199A deduction, regardless of pass-through business type—when you have

• Pass-through qualified business income (QBI), and 
• 2019 Form 1040 taxable income equal to or less than $160,700 (single / head of household) or $321,400 (married, filing jointly)

With Form 1040 taxable income equal to or less than the thresholds listed above a typical agency with pass-through income qualifies for the deduction.

There’s no problem with income below the thresholds. And the calculation is easy. 

With taxable income equal to or less than the thresholds, you qualify for the Section 199A deduction. Your deduction will equal the lesser of:

• 20% of your Form 1040 taxable income less net capital gains and dividends, or 
• 20% of your QBI.

Just note the qualification for the deduction begins with your Form 1040 taxable income.

The scenario

You’re married with joint taxable income of $320,000 and a QBI of $350,000. Your Section 199A deduction is $64,000.

As you can see, no issues here. If your taxable income is above the thresholds, you need to start tax planning—now. Why now? Because some strategies require that you have time on your side. 

As an example, if you switch from a proprietorship to an S corporation to benefit from the W-2 wage strategy, your switch does not begin until you have the S corporation in place.

If you are looking at a retirement plan strategy, you want time to consider your options and get that tax-savings plan in place.