199A tax reduction strategies

2023 Last-Minute Section 199A Tax Reduction Strategies

Remember to consider your Section 199A deduction in your year-end tax planning. If you don’t, you could end up with an undesirable $0 for your deduction amount.
Here are three possible year-end moves that could, in the right circumstances, simultaneously (a) reduce your income taxes and (b) boost your Section 199A deduction.

First Things First

If your taxable income is above $182,100 (or $364,200 on a joint return), your type of business, wages paid, and property can increase, reduce, or eliminate your Section 199A tax deduction.

If your deduction amount is less than 20 percent of your qualified business income (QBI), then consider using one or more of the strategies described below to increase your Section 199A deduction.

Strategy 1: Harvest Capital Losses

Capital gains add to your taxable income, which is the income that 

  • determines your eligibility for the Section 199A tax deduction,
  • sets the upper limit (ceiling) on the amount of your Section 199A tax deduction, and
  • establishes when you need wages and/or property to obtain your maximum deductions.

If the capital gains are hurting your Section 199A deduction, you have time before the end of the year to harvest capital losses to offset those harmful gains.

Strategy 2: Make Charitable Contributions

Since the Section 199A deduction uses your Form 1040 taxable income for its thresholds, you can use itemized deductions to reduce and/or eliminate threshold problems and increase your Section 199A deduction.

Charitable contribution deductions are the easiest way to increase your itemized deductions before the end of the year (assuming you already itemize).

Strategy 3: Buy Business Assets

Thanks to Section 179 expensing, you can write off 100 percent of most property and equipment. Alternatively, you can use bonus and MACRS depreciation to write off more than 80 percent. To make this happen, you need to buy the assets and place them in service before December 31, 2023.

The big asset purchases and write-offs can help your Section 199A deduction in two ways:

  1. They can reduce your taxable income and increase your Section 199A deduction when they get your taxable income under the threshold.
  2. They can contribute to an increased Section 199A deduction if your Section 199A deduction currently uses the calculation that includes the 2.5 percent of unadjusted basis in your business’s qualified property. In this scenario, your asset purchases increase your qualified property, which in turn increases your Section 199A deduction.

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