What You Need to Know About the Tax Cuts and Jobs Act of 2017, Section 199A

by | Aug 22, 2018 | HR

Last year, the United States government passed The Tax Cuts and Jobs Act of 2017. Many new laws and regulations were put in place, including Section 199A. At first, this change was met with little concern, but after further review, some accountants speculated that businesses working with a third-party entity to pay employee wages — including a PEO — would face adverse consequences in terms of the tax deductions they could take. The IRS has taken time to clarify the issue and recently released guidance that confirms that no negative effects will face businesses that partner with a PEO. So, what exactly does all this mean, and what are the positives? We’ve taken three common questions around the new IRS guidance, and explained how this could impact small businesses. Let’s take a look.

Question: What was in place prior to the Tax Cuts and Jobs Act of 2017?

Answer: Prior to the Tax Cuts and Jobs Act of 2017, Section 199A did not exist. Previously, a provision called Section 199 was available and was mainly devoted to providing deductions to manufacturing companies. Other businesses found no advantage or disadvantage within this specific section and often did not place any focus on these deductions.

Question: What is Section 199A?

Answer: Section 199A was born with the new regulations set in 2017. Section 199A was formed in order to broaden the tax deductions available to businesses from Section 199. For example, prior to the reform, certain tax breaks were only available for larger corporations and were not being passed down for pass-through entities to utilize. With the new section available, pass-through entities can claim their numerous corporate expenses while possibly qualifying for an additional 20 percent tax deduction.

Question: What does this mean for companies partnering with a PEO?

Answer: According to the recent IRS guidance, Section 199A is nothing but a positive for companies who partner with a PEO. This new regulation has leveled the playing field between large corporations and small businesses because of the new deductions available, along with the potential additional 20 percent. If utilized properly, Section 199A can significantly improve the income versus expense ratio, as well as tax liability for small businesses.

For more information on how Section 199A can benefit your small business, contact WorkSmart Systems!