Futrli Forecasting and Reporting

Tax Breaks

IRS Section 199A Final Regs Shed New Light on Service Businesses

Remember, new tax code Section 199A offers you a 20 percent tax deduction gift if you have

  • pass-through business income (such as from a proprietorship, a partnership, or an S corporation), and

  • 2018 taxable income of $315,000 or less (married, filing jointly) or $157,500 or less (filing as single or head of household).

But once your taxable income is greater than the relevant amount listed above (which Section 199A calls a “threshold”), your Section 199A tax deduction becomes more complicated. Under the rules that apply to this new Section 199A tax deduction, the tax code creates two types of businesses:

  • Business that are in favor and can realize the new deduction regardless of taxable income.

  • Business that are out of favor. The tax code calls the out-of-favor business a “specified service trade or business.”

If you own an out-of-favor specified service trade or business, you suffer a zero Section 199A tax deduction on that business’s out-of-favor income when you have 1040 taxable income greater than $415,000 (married, filing jointly) or $207,500 (filing as single or head of household). 

With taxable income greater than the $315,000/$157,500 threshold and less than the $415,000/$207,500 upper limit, Section 199A reduces the tax deduction available to your out-of-favor specified service trade or business.

This brings us to the question: What if your taxable income is above the limit, but your pass-through business has one part that’s out of favor and another part that’s in favor? You will like what the rules have done for you if you are in this situation. The new regulations make it clear that it is possible for you to benefit from the de minimis rule.

The rule. If the trade or business has annual gross receipts of $25 million or less, it is an in-favor business if it gets less than 10 percent of its gross receipts from an out-of-favor specified service trade or business, such as (among others) law, consulting, accounting, and health care. If gross receipts are greater than $25 million, substitute 5 percent for the 10 percent.

De Minimis Example 1


Green Lawn LLC sells lawn care and landscaping equipment and also provides advice and counsel on landscape design for large office parks and residential buildings. 

The landscape design services include advice on the selection and placement of trees, shrubs, and flowers and are considered under Section 199A an out-of-favor consulting business. 

Green Lawn LLC separately invoices for its landscape design services and does not sell the trees, shrubs, or flowers it recommends for use in the landscape design. Green Lawn LLC maintains one set of books and records and treats the equipment sales and design services as a single trade or business.

Green Lawn LLC has gross receipts of $2 million, of which $250,000 is attributable to the landscape design services, a consulting business. Because consulting services are 10 percent or more of total gross receipts, the entirety of Green Lawn LLC’s trade or business is an out-of-favor specified service trade or business.


De Minimis Example 2


Veterinarian LLC provides veterinarian services performed by licensed staff and also develops and sells its own line of organic dog food at its veterinarian clinic and online. The veterinarian services are in the out-of-favor specified service trade or business of health care.

Veterinarian LLC separately invoices for its veterinarian services and the sale of its organic dog food. It maintains separate books and records for its veterinarian clinic and its development and sale of dog food. Veterinarian LLC also has separate employees who are unaffiliated with the veterinary clinic and work only on the formulation, marketing, sales, and distribution of the organic dog food products. 

Veterinarian LLC treats its veterinary practice and the dog food development and sales as separate trades or businesses for purposes of Sections 162 and 199A. It has gross receipts of $3 million. Of the gross receipts, $1 million is attributable to the out-of-favor veterinary services. 

Although the gross receipts from the services in the field of health care exceed 10 percent of Veterinarian LLC’s total gross receipts, the dog food business is a separate, in-favor business.

Note that Animal Care wins because it has two trades or businesses, which it proves with its financial books and its separation of its employees. 

Green Lawn LLC, in the previous example, failed because it had one business only, which it also proved by the way it kept its books.

If you would like to learn more about how to implement strategies like this in your business, contact our team by clicking the button below.

Tax Reform’s New Qualified Opportunity Funds

Qualified opportunity funds are a new tax-planning strategy created by the Tax Cuts and Jobs Act tax reform. 

The new funds have the ability to defer current-year capital gains, eliminate some of them later, and then on the new investment make capital gains tax-free. To put the benefits in place, you need to navigate some new rules and time frames.

Example: On December 1, 2018, you sell $8 million of stock with a cost basis of $3 million for a long-term capital gain of $5 million. 

  • Within 180 days, you invest the $5 million gain in a qualified opportunity fund.

  • You make an election on your 2018 tax return to defer the $5 million in long-term capital gain income, meaning no taxes on this gain in 2018.

  • On December 31, 2026, your qualified opportunity fund has a basis of $750,000 (15 percent of the deferred $5 million capital gain), since you held it for at least seven years.

  • Let’s assume the fund has a fair market value of $7 million on December 31, 2026. You’ll have a deemed sale on December 31, 2026, and recognize $4.25 million in income, computed as follows:

    • $5 million, which is the lesser of the deferred gain ($5 million) or the fair market value of the fund ($7 million), less

    • $750,000, the basis in the fund.

  • On January 1, 2027, your basis in the qualified opportunity fund is $5 million ($750,000 original basis plus $4.25 million of deferred gain recognized and taxed in 2026).

  • If you sell the qualified opportunity zone fund in August 2028 for $10 million, then your basis in the fund is $10 million and you recognize no taxable gain on the sale, since you held it for more than 10 years.


Overall, you have a total of $10 million in gains from these transactions: $5 million from 2018 and $5 million in 2028. Using the qualified opportunity fund investment strategy, you


  • temporarily defer $4.25 million of long-term capital gain from 2018 to 2026, and

  • permanently exclude from tax $750,000 of long-term capital gain from 2018 and $5 million of gain in 2028.


For this strategy to make great financial sense, you need (a) appreciation in your qualified opportunity fund and (b) to hold the investment for at least 10 years so that the appreciation is tax-free to you when you sell your investment.


2018 Last-Minute Vehicle Purchases to Save on Taxes

Two questions

  1. Do you need a replacement business car, SUV, van, or pickup truck?

    2. Do you need tax deductions this year?

If you answered “yes” to both questions, here are some ideas for you to consider:

1. Buy a New or Used SUV, Crossover Vehicle, or Van with a GVWR Greater than 6,000 Pounds

Let’s say that on or before December 31, 2018, you or your corporation buys and places in service a new or used SUV or crossover vehicle that the manufacturer classifies as a truck and that has a gross vehicle weight rating (GVWR) of 6,001 pounds or more. This newly purchased vehicle gives you four big benefits: 

  • Bonus depreciation of 100 percent (new, thanks to the TCJA)

  • Section 179 expensing of up to $25,000

  • MACRS depreciation using the five-year table

  • No luxury limits on vehicle depreciation deductions

2. Buy a New or Used Pickup with a GVWR Greater than 6,000 Pounds

If you or your corporation buys and places in service a qualifying pickup truck (new or used) on or before December 31, 2018, then this newly purchased vehicle gives you four big benefits.

  • Bonus depreciation of 100 percent

  • Section 179 expensing of up to $1,000,000 

  • MACRS depreciation using the five-year table

  • No luxury limits on vehicle depreciation deductions

To qualify for full Section 179 expensing, the pickup truck must have

  • a GVWR of more than 6,000 pounds, and

  • a cargo area (commonly called a “bed”) of at least six feet in interior length that is not easily accessible from the passenger compartment.


Short bed

If the pickup truck passes the more-than-6,000-pound-GVWR test but fails the bed-length test, tax law classifies it as an SUV. That’s not bad. It’s still eligible for the $25,000 SUV expensing limit plus 100 percent bonus depreciation. See Section 1 above for how this works.

3. Buy a New or Used Qualifying Cargo or Passenger Van with a GVWR Greater than 6,000 Pounds

A new or used cargo or passenger van bought and placed in service on or before December 31, 2018, can qualify for four big tax benefits:

  • Bonus depreciation of 100 percent

  • Section 179 expensing of up to $1,000,000 

  • MACRS depreciation using the five-year table

  • No luxury limits on vehicle depreciation deductions

Cargo van

To qualify for full Section 179 expensing, the cargo van must

  • have a GVWR of more than 6,000 pounds,

  • fully enclose the driver compartment and load-carrying area, 

  • not have seating behind the driver’s seat, and 

  • have no body section that protrudes more than 30 inches ahead of the leading edge of the windshield.

If the van passes the GVWR test but fails one of the other qualifying tests listed above, the law deems it an SUV. 

Passenger van

If the van has a GVWR of greater than 6,000 pounds and seats more than nine people behind the driver’s seat, it is a tax law–defined passenger van, not an SUV, and it qualifies for full Section 179 expensing of up to $1,000,000 and 100 percent bonus depreciation.

4. Buy a Depreciation-Limited New or Used Car, SUV, Truck, or Van

If you or your corporation buys and places in service a new or used passenger vehicle such as a car (or a pickup, SUV, or van with a GVWR of 6,000 pounds or less) on or before December 31, 2018, then you or your corporation may claim up to $8,000 in bonus depreciation. 

Tax reform increased the 2018 luxury passenger vehicle depreciation limits to

  • $10,000 for the first taxable year in the recovery period.

  • $16,000 for the second taxable year in the recovery period,

  • $9,600 for the third taxable year in the recovery period, and

  • $5,760 for each succeeding year in the taxable period.

Here’s how this works: Say you buy a car. You add the $8,000 in bonus depreciation to the $10,000 car limit, for a 2018 limit of $18,000. To get to this limit, you can use a combination of bonus depreciation and regular depreciation. You reduce the $18,000 limit by any personal use.