In the second episode of Practical Tax, tax attorneys Steve Moskowitz and Liz Prehn discuss the new tax law of 2018 – specifically, section 199A. If you qualify, this section lets you pay taxes on only 80% of your profit, instead of 100%. Listen to the podcast to learn more!

Episode Transcript

Speaker 1: 00:00 I think I'm a pretty smart guy. I mean, I read the Wall Street Journal. Then this guy I know the gym tells me he's paying taxes on only 80% of his income. It's this thing in the new tax law called 199A. It sounds interesting. We have the same occupation. Am I missing something?

Speaker 2: 00:15 You're listening to Practical Tax, with tax attorney Steve Moskowitz.

Steve Moskowitz: 00:20 The new tax law of 2018 has remarkable opportunities for taxpayers to save money, but it also has some very precise requirements that can take those benefits away from you. Today we're going to discuss my absolute favorite new section of the Internal Revenue Code, 199A, that, if you qualify, lets you pay taxes on only 80% of your profit instead of 100%. Joining me is my longtime colleague, tax attorney Liz Prehn.

Liz Prehn: 00:50 Hi, Steve. Why don't you give us a little bit of the basics of 199A. It's so fascinating. We've had a lot of fun with it this year.

Steve Moskowitz: 00:56 Well, first, for the first time in American tax law, it matters what you do for a living. There's a special group, and it's not good to be in this group. It's called specified trades or businesses, for example, doctors, lawyers.

Liz Prehn: 01:09 Sometimes it can be good.

Steve Moskowitz: 01:10 Well, it can if you know it and how to get around it. So we say, "Well, all right. We have a situation where there's some magic numbers. If you're single, it's 157,500, married, it's 315,000, double that, with an extra 50,000 if you're single for a partial benefit and a hundred if you're married." But let's take an example of Sally. Sally is an orthopedic surgeon. She makes a profit of $1 million. Say, "Well, wait a minute. Sally is way over the limit." Is there any deduction for her? Liz, is there some way around to get the... this orthopedic surgeon?

Liz Prehn: 01:43 Well, plus she's in a specified service group, right? That was one of the interesting things this year, was counseling some of our doctors and lawyers and accountant clients as to how this tax provision is going to affect them because they don't get the benefit. Generally, the general rule is they don't get the benefit of the 20% tax deduction. But we had a lot of fun really diving into our clients' businesses and figuring out maybe what qualified and what did not, or what could be spun off as a different business entity. Now the revenue service did give us some guidelines. Final guidelines were... When were those issued Steve?

Steve Moskowitz: 02:15 Very recently. For example, Sally in my example could set up a separate business that's not part of the specified trader business. In her case, it's, forgive the colloquialism, selling spare parts, the artificial knees, the artificial hips. What she can do is set up a separate S corporation that's not subject to these more stringent rules and get around the fact that she's in this specified group. That's one of the things that, if you're in this specified group, you want to take a look at because if you qualify, that's a way around them.

Liz Prehn: 02:47 Right. I think some of the law practices had a little bit harder time trying to fit into these new regulations. But a lot of what we found, was a lot of the law partners that had these associations, they also held real estate and different real estate interests. Now real estate was also a big boom to this new tax law.

Steve Moskowitz: 03:04 Yes it was. With real estate, we have all kinds of things. First of all, does real estate qualify for the 80% of the profit deal? Yes, if it's a real estate business. No, if it's a real estate investment.