October 23rd 2024.
I wanted to share a quick post with some technical information that could potentially benefit you. Have you ever considered using a fiscal year or changing your fiscal year to maximize your Section 199A deduction? Believe it or not, this strategy could potentially give you an extra year of deductions even if the law expires at the end of 2025.
Let's say you're expecting a significant Section 199A deduction on your tax return, maybe around $1,000,000 or even more. By starting a new business with a fiscal year or changing the fiscal year of your existing business, you could potentially save an additional $400,000, $500,000, or even more in federal taxes. Now, let's dive into the details and see if you agree.
I have to admit, I didn't always think this was possible. When I wrote my book "Maximizing Section 199A Deductions" back in 2017, I believed this strategy wouldn't work. However, my thinking has changed since then. So, let's take a closer look at the statutory language of Section 199A.
The first thing we need to examine is the language of the Section 199A applicability "end" date in the actual statute. It states that the section shall not apply to taxable years beginning after December 31, 2025. This means that a calendar taxable year that starts on January 1, 2025 would work. But what about starting on February 1, 2025 or any other date within 2025? It seems like those would also be valid options since they do not begin after December 31, 2025.
Now, here's where it gets interesting. If Congress wanted to prevent taxpayers from taking a Section 199A deduction on a fiscal year tax return that begins in 2025 but ends in 2026, they could have written the language differently. For example, they could have stated that the section shall not apply to taxable years beginning and ending after December 31, 2025. But they didn't, so there may be a way for taxpayers to use a fiscal year to their advantage.
If you already agree with my analysis or have always thought the same thing, you can stop reading here. You have all the information you need, and you don't need to spend any more time on this. However, for those who vaguely remember reading something different or for accountants who may have heard a different explanation, let me continue.
The source of my initial confusion (and possibly yours too) is the applicability "starting" date language from the regulations. This language works differently and is what initially triggered my confusion. It states that the regulations apply to taxable years ending after February 8, 2019. But there is an exception for non-calendar year RPEs (relevant pass-through entities) such as partnerships or S corporations. If their fiscal year started in 2017 and ended in 2018, they were allowed to take the Section 199A deduction on their 2018 tax return.
In essence, even though the Section 199A only became effective for tax years beginning after December 31, 2017, fiscal year RPEs were able to take advantage of the deduction for the income earned in 2017 but reported on their 2018 tax return. Many people (myself included) applied this special rule to the situation where the Section 199A ends after 2025, but this interpretation is incorrect.
A side note: Section 11011 of the Tax Cuts and Jobs Act sets the applicable date for Section 199A as "taxable years beginning after December 31, 2017."
Now, let's address the obvious first question: Can a relevant pass-through entity use a fiscal year or change its fiscal year to take advantage of an extra year of Section 199A deduction? The short answer is maybe.
As we've established, the section doesn't apply to taxable years beginning after December 31, 2025. However, there are two possible ways to wiggle into using a fiscal year. The first wriggle is through Section 442, which allows partnerships and S corporations to change from a calendar year to a natural year. The second wriggle is through Section 444, which allows new partnerships or S corporations to adopt a fiscal year that ends in September, October, or November.
Therefore, theoretically, any partnership or S corporation could potentially change its taxable year from a calendar year to a fiscal year that begins before December 31, 2025, using Section 442. Additionally, new partnerships or S corporations could make a Section 444 election to start their fiscal year on October 1, November 1, or December 1 of 2024 or 2025. This strategy could potentially give them an additional year of Section 199A deductions.
I hope this post has shed some light on a potentially beneficial strategy for maximizing your Section 199A deduction. Of course, as with any tax planning, it's always best to consult with a professional to determine if this strategy is right for you. But for now, you have all the information you need to make an informed decision.
Hey everyone, I wanted to share a quick post about a potential strategy to maximize your Section 199A tax deduction. You may be able to get an extra year of deductions by utilizing fiscal year planning, even if the law expires in 2025 as scheduled.
Let's say you're expecting a large deduction under Section 199A on your tax return, maybe around $1,000,000 or even more. Did you know that by starting a new business with a fiscal year or changing the fiscal year of your existing business, you could potentially save an additional $400,000 or $500,000 in federal taxes? Let me break down the details for you and see if you agree.
Now, I have to confess, I didn't always believe this was possible. In fact, when I wrote my book "Maximizing Section 199A Deductions" back in 2017, I thought this strategy wouldn't work. But after further research, I've come to realize that it just might. So let's dive into the specifics.
First, let's take a look at the language used in the Section 199A statute regarding the "end" date for applicability. It states that this section will not apply to taxable years beginning after December 31, 2025. So, it's clear that a calendar year starting on January 1, 2025 would work. But what about starting on a different date within the year, like February 1 or March 1? These also fall within 2025, so they should still be eligible for the deduction.
You may be thinking, "Well, if Congress wanted to prevent someone from taking the deduction on a fiscal year tax return that starts in 2025 but ends in 2026, couldn't they have written the statute differently?" And you're absolutely right. They could have added language that states the section will not apply to taxable years beginning and ending after December 31, 2025. But they didn't, which leaves room for a potential opportunity.
For those of you who already knew about this strategy, you can stop reading now. But for those who may have heard conflicting information, let me continue. The confusion may have stemmed from the applicability date language in Regulation 1.199A-1. This language states that the regulations apply to taxable years ending after February 8, 2019. But there is a special exception for non-calendar year relevant pass-through entities (RPEs), such as partnerships or S corporations. If their fiscal year started in 2017 and ended in 2018, they were able to take the deduction on their 2018 tax return. This was a pleasant surprise for those entities, as the Section 199A deduction didn't take effect until after 2017. However, this does not necessarily mean that the same rule applies when the section expires after 2025.
Now, let's get to the big question - can a relevant pass-through entity use a fiscal year or change their fiscal year to take advantage of an extra year of Section 199A deductions? The answer is...maybe. As we've established, the statute states that the section will not apply to taxable years beginning after December 31, 2025. But there are two potential ways to get around this.
First, Section 442 allows partnerships and S corporations to change from a calendar year to a fiscal year. And second, Section 444 allows new partnerships and S corporations to adopt a fiscal year that ends on September 30, October 31, or November 30. So theoretically, any partnership or S corporation could potentially change their taxable year to a fiscal year that starts before December 31, 2025 using Section 442. Additionally, new partnerships and S corporations can make a Section 444 election that starts their fiscal year on October 1, November 1, or December 1 of 2024 or 2025.
So there you have it - a potential strategy to get an extra year of Section 199A deductions. Of course, this may not be the best option for everyone, so be sure to consult with a tax professional to determine if this is the right move for your business. Thanks for reading and happy tax planning!
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