Tax Break Alert: Could You Be Missing Out on the 20% Deduction?

If you operate as a sole proprietor or a single-member LLC, bring in strong earnings, and do not have employees or much equipment, you may be overlooking one of the most valuable tax benefits available to business owners.

That benefit is the Section 199A deduction, which can be worth as much as 20% of qualified business income. For many owners, however, the deduction can shrink to almost nothing once income rises above a certain level. In many cases, the remedy is easier than expected.

The Issue

The 199A deduction is valuable, but once taxable income passes a threshold, different rules apply. At that stage, the size of the deduction depends in part on whether the business pays W-2 wages or owns depreciable property.

When a business has no payroll and little significant equipment, the deduction can fall dramatically, sometimes all the way to a $400 minimum, even if the business is highly profitable.

For example, a sole business owner with $400,000 in proprietorship income, $370,000 in taxable income, and no employees could end up with only a $400 Section 199A deduction. That leaves a large amount of potential tax savings unused.

A Possible Solution: S Corporation Status

One option is to form an S corporation and pay yourself a reasonable salary, such as $100,000 a year. That approach can produce two important benefits:

1. Lower payroll taxes. For a sole proprietor at this income level, self-employment tax and the additional Medicare tax can total about $35,000 annually. Structuring $100,000 as S corporation wages can reduce that bill by nearly $19,000.
2. The deduction can return. Paying W-2 wages is one of the key requirements for restoring the Section 199A deduction once income exceeds the threshold. In this example, the deduction could increase from $400 to about $17,500 in tax savings.

Combined, those changes could leave the business owner with nearly $37,000 more after tax each year. Because Congress made the Section 199A deduction permanent, this is not a temporary opening but a long-term planning issue.

Important Limits

• This approach does not help specified service businesses, including doctors, lawyers, accountants, and similar professions.
• The salary must be reasonable. The IRS expects the wage paid through an S corporation to match the value of the work performed, rather than an artificially low amount chosen only to reduce taxes.

Could This Apply to You?

If you are a high-earning sole proprietor with little or no payroll and have not looked into an S corporation election, it may be worth reviewing the numbers. The best answer depends on your income, your business structure, and what qualifies as a reasonable salary in your situation, so it is a question best handled with an accountant.

For more information, contact Saunders Tax & Accounting at http://www.saunderstax.com or call 301-714-2071. Open Monday through Thursday, 9 am to 5 pm. Awarded the Hagerstown Hot List 2026 and Hagerstown Chamber of Commerce “2023 Small Business of the Year” — providing a Less Taxing Life and More Prosperous Solutions since 1984!