Maximizing the 20% Pass-Through Deduction for Specified Service Trade or Businesses

If you have a business (other than a C Corporation) and you haven’t heard of the 20% Pass-Through Deduction under Section 199A, we’d like to introduce ourselves to you as your new CPA. The quick and dirty explanation is that, starting in 2018, you can reduce the taxability of income from your business by as much as 20% without actually spending money. You read that correctly: if you would have otherwise been taxed on, for example, $100K of net income from your business, it could be taxed as if it were $80K, even though there is not actually $20K in expense you have to come out-of-pocket for. The reason this was written into the Code via the Tax Cuts & Jobs Act was to put small business on parity with the lowered tax rates for C Corporations.

What’s the catch? Well, there are a lot of criteria here that can lower the amount of the deduction that you can take or disallow it entirely. The first and most important criterion is whether your business is a Specified Service Trade or Business (SSTB). For the most part, if your business generates income from the services of “professionals,” then your business is likely an SSTB. This would include the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners. This post will focus on the strategies for businesses that find themselves in the less tax-favored SSTB bucket.

To begin, the easiest workaround is to get the entire amount of the 20% pass-through deduction is to get your total taxable income below $321,400 if you’re married or $160,700 if you’re unmarried (these are the new thresholds for 2019). You will get the entire 20% deduction if your taxable income on your personal tax return is below these amounts. The deduction begins to phase out as you exceed those amounts. If you’re married, the deduction is totally phased out at $421,400 and if you’re unmarried the deduction is totally phased out at $210,700.

You might be thinking, “that’s great, Dark Horse, but I make a lot of money and getting below those thresholds is going to be difficult…what can I do to reduce my income?” Astute question! We would start by looking at maximizing retirement contributions. If you’re an S-Corp owner, this means paying yourself enough via W-2 wages (which you already SHOULD be doing) to be able to max out both the EE and ER contributions, which could allow you to deduct up to $56K ($62K if you’re older than 50) or double both of those amounts if you are married and your spouse is employed by the business.

Next, consider buying fixtures, furniture and equipment which can be financed to ease cash flow considerations. Remember, you can use 100% bonus depreciation to fully deduct the cost of the asset when placed in to service, even though you might not be paying the loan off for another couple years.

On the personal front, make an extra mortgage payment, consider being extra charitable, push forward a large medical expense, pay points on a new mortgage, fund your HSA, deduct your health insurance premiums (if they are paid by the business and not sponsored by a spouse’s employer). There are many ways to help yourself out here and we can share a few additionally advantageous moves that can work out very well for certain types of clients.

When you do any of the above, you’re actually deducting more than a dollar for every dollar you put in for that additional deduction since you are unlocking part or all of the Pass-Through Deduction.

After you’ve exhausted all of the above options, if you find that you’re still partially or fully phased out, you should look at your revenue streams to see if any of those revenue streams would constitute qualified business income that could be carved out separate from the restricted income from your SSTB revenue streams. This area is beyond the scope of this post, but there are opportunities to deploy a strategy of separating these revenue streams and related expense so that not all of your business’ income is treated less favorably for tax purposes. You’ll want to talk to us if you’re interested in exploring this. Whatever taxable income become qualified business income via this effort would still have a different set of rules that would need to be considered to maximize the 20% deduction

The bottom line here is that your total taxable income on your personal tax return is going to affect the amount of the Pass-Through Deduction you’re able to take from SSTB income, so you best plan wisely.

If your business is not an SSTB, or a portion of it isn’t (via a strategy loosely outlined above), there are a separate set of rules you’ll want to make sure you understand to maximize your deduction. That will be the topic of our next blog post.

About Dark Horse CPAs

Dark Horse CPAs provides integrated tax, accounting, and CFO services to small businesses and individuals across the U.S. The firm was founded to save small businesses (and their owners) from subpar accounting and tax services and subpar client experiences. These small businesses are Dark Horses among their larger and more well-known competition. Being a Dark Horse CPA means advocating for small businesses by bringing them the tax strategies and accounting insights previously reserved for big business. Get a quote today.

Recent Article

Read All Articles

Sep 18, 2020

Proposed Natural Disaster Tax Relief Bill

Senate Democrats have introduced a bill to provide tax relief to those affected by the wildfires in the West and the hurricanes in the South. For those who missed it, we covered this on our latest episode of This Week This Morning. Those who have suffered property losses, and are in a disaster zone identified by FEMA, could qualify for:

An exception to the 10% penalty for early withdrawals from retirement plans (IRA, 401K, 403b, etc.). Further, the income tax due on these withdrawals would be due in even installment over a 3-year period. This would likely provide tax relief for 2020 – 2022. Any amounts you distribute from retirement accounts can be re-contributed in later years on top of your normal contributions.
A 40% tax credit for up to $6,000 of wages per employee. The employer must be disaster-affected and the employee must be in a qualified disaster zone.
There would be no 10% of AGI limitation on the deductibility of losses on Schedule A. Stated differently, if you itemize, your entire loss (net of insurance proceeds) would be deductible.
Taxpayers could choose to use 2019 earned income for purposes of claiming the Earned Income Tax Credit and Child Tax Credit for tax year 2020.

Regardless of whether this tax relief, the IRS stated on Thursday that it will provide tax relief to victims of the Oregon wildfires. The list of disasters included will likely expand. The relief includes extending payment and filing dates to January 15, 2021 that would have otherwise been due after September 6, 2020.

Keep an eye on whether your residence is in a FEMA-declared disaster zone by clicking here. If you’re not there yet, check back again as this is a developing situation.

About Dark Horse CPAs

Read Articles

Feb 13, 2025

Tax Planning: Beyond the Ordinary Return Preparation

The world of tax planning is often misunderstood, with many CPAs trapped in a mundane cycle of routine tax return filings and minimal client communication. Tax professionals often operate like assembly line workers, churning out returns during peak seasons and offering little more than surface-level, so-called “planning” advice relegated to out-of-habit recommendations to purchase more equipment for depreciation or contribute to retirement plans.

It's more Art than Science

But true tax planning is an art form—a strategic dance of financial optimization that requires deep understanding of the client, proactive thinking, and a commitment to delivering genuine value. It's not about checking boxes on a return or following a generic, one-size-fits-all template; it's about crafting a personalized approach that transforms tax obligations into opportunities for tax savings and achieving the long-term goals of the client.

To be fair, not every taxpayer needs complex tax planning. While there is sometimes benefit even for those with straightforward financial situations, it may be quite minimal. However, business owners, rental property investors, individuals with stock compensation structures, and those with significant or complex investments can often unlock tremendous savings through strategic tax advisory.

The CPA Strategist vs the Preparer

What separates exceptional tax professionals from the average is their ability to move beyond the out of habit recommendations and truly engage with the client to create a comprehensive, transparent tax planning process. This means ditching the outdated hourly billing models that discourage communication and instead establishing a partnership focused on measurable outcomes where the savings clearly exceed the cost of the service. A well-structured tax planning engagement should include a transparent fee structure (ideally a fixed cost), a clear roadmap for the process, and well-defined deliverables.

After all, effective tax planning isn't a one-time conversation but an ongoing dialogue. It requires collaborative effort, with clear expectations about who does what and when. Tax professionals must identify opportunities, provide the action steps, and maintain consistent follow-up, while clients must be willing to take the actions needed to achieve the end results. And the most sophisticated tax planning considers more than just immediate savings. It evaluates cash flow implications, potential long-term impacts, and ensures that recommended strategies are financially sustainable. A truly excellent tax professional doesn't just reduce your tax bill—they help you understand how and why those reductions are possible.

At its core, strategic tax planning isn’t just about managing financial obligations; it’s about turning tax season from a stressful rush into a smooth, well-prepared process. By actively engaging in tax planning throughout the year, individuals are not only optimizing wealth management but also removing the pressure when tax filing season arrives. With a clear, projected tax landscape already in place, deadlines become less daunting—even if filing occurs after the extended deadline, there will already be peace of mind knowing everything has been carefully mapped out

At Dark Horse CPAs we get it—tax planning can be overwhelming. That's why we're here to help. Our team is dedicated to providing clear, value-based strategies tailored to your unique situation. Let's work together to make tax planning straightforward and beneficial for you. Reach out and let’s see if we can make a difference, together.

About Dark Horse CPAs

Dark Horse CPAs provides an integrated suite of services including tax, accounting, fractional CFO, and wealth management to small businesses and individuals across the U.S. The firm was established to transform the client experience by offering personalized, high-quality services that small businesses and individuals deserve. As Dark Horses in their industries, these businesses benefit from advanced tax strategies and accounting insights typically reserved for larger companies. With a nationwide presence and a team of dedicated professionals, Dark Horse CPAs is committed to your success. Get a quote today.