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How Some High-Income Taxpayers Can Maximize the New 20% Pass-through Business Deduction
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Article Highlights: 20% Sec. 199A Pass-through Deduction Specified Service Business Limitations Taxable Income Limitations Wage Limitations Benefits of Being Organized as an S Corporation Taxpayers with higher 1040 taxable incomes who are self-employed but are not “specified service businesses” may find it beneficial to structure new businesses, or restructure an existing business, as an S corporation to avoid taxable income limitations that apply to the new 20% Sec. 199A pass-through deduction. To make up for the tax reform’s reduction of the C corporation tax rate to 21%, from which other forms of business activities do not benefit, Congress created a new deduction and code section: 199A. The 199A deduction is for taxpayers with other business activities – such as sole proprietorships, rentals, partnerships and S corporations – since, unlike C corporations, which are directly taxed on their profits, the income from the other business activities flows through to the owner’s tax return and is taxed at the individual level, i.e., at the individual’s tax rate, which can be as high as 37%. This new Sec. 199A deduction is 20% of the pass-through income from these business activities. But not every owner of these flow-through businesses will benefit from this deduction because, as in all things tax, there are limitations. Whether or not a taxpayer will benefit from the deduction will depend in great part upon the taxpayer’s 1040 taxable income figured without the Sec. 199A deduction. Married taxpayers with a taxable income below $315,000 (or below $157,500, for others) will benefit from the full 20% deduction. However, limitations begin to apply when a taxpayer’s 1040 taxable income exceeds those amounts. The most restrictive limitation is the one placed on “specified service businesses.” Once married taxpayers filing jointly have a 1040 taxable income exceeding $415,000 (or above $207,500, for others), they receive no Sec 199A deduction benefit from any pass-through income derived from a specified service business. Specified service businesses include trades or businesses involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, or brokerage services or any trade or business in which the principal asset of the trade or business is the reputation or skill of one or more of its employees or owners. Note that an engineering or architecture business is not a specified service business for this deduction. On the other hand, a taxpayer can still benefit from pass-through income from other business activities, even when the taxpayer’s 1040 taxable income exceeds the $415,000/$207,500 limits, provided the business activity pays wages and/or has qualified business property, the combination of which make up what is referred to as the wage limitation. Without getting too complicated, the Sec. 199A deduction is the lesser of 20% of one’s pass-through income or the wage limitation. If the wage limit is zero, then the Sec. 199A deduction would also be zero for these high-income taxpayers. The wage limitation itself is the greater of 50% of the wages paid by the business activity or 25% of the wages paid plus 2.5% of the cost of qualified business property. Perhaps this is best explained by example.
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Tax and Financial Insights
by NR CPAs & Business Advisors
2026 IRS Mileage Rates: Key Updates and Insights
The IRS has rolled out the inflation-adjusted mileage rates for 2026, offering taxpayers an efficient way to claim deductions for vehicle-related expenses incurred for business, charity, medical, or moving purposes. These adjustments reflect the continued economic shifts impacting car operation costs.
Effective January 1, 2026, the new standard mileage rates are established as follows:
- Business Travel: Increased to 72.5 cents per mile, inclusive of a 35-cent-per-mile depreciation allocation. This marks a rise from the 70 cents per mile rate set for 2025
- Medical/Moving Purposes: Reduced slightly to 20.5 cents per mile, down from 21 cents in the previous year, reflecting the variable cost considerations.
- Charitable Contributions: Consistent at 14 cents per mile, a fixed rate unchanged for over a quarter-century.
As is typical, the business mileage rate considers the integral fixed and variable costs of automobile operation. Meanwhile, the medical and moving rates remain contingent on variable expenses as determined by the IRS study.
It is critical to note that the One Big Beautiful Bill Act (OBBBA) held firm on disallowing moving expense deductions except for specific cases within the Armed Forces and intelligence community, marking a substantial shift since 2017.
When engaging in charitable work, taxpayers might opt for a direct expense deduction over the per-mile method, covering gas and oil costs. However, comprehensive upkeep and insurance costs are non-deductible expenses.
Business Vehicle Use Considerations: Taxpayers can alternatively compute vehicle expenses using actual costs, which might benefit from shifting depreciation rules, particularly through bonuses and first-year advantages. Keep in mind, however, reverting from actual cost calculations to standard rates in subsequent years is restricted, particularly per vehicle protocol and when exceeding four vehicles in concurrent use.
Additionally, parking, tolls, and property taxes attributable to business can be deducted independently of the general rate, an often-overlooked advantage by many business owners.
Tax Strategies for Employers and Employees: Reimbursements based on the standard mileage framework, providing the right documentation is in place, remain tax-free for employees. Meanwhile, the elimination and continued prohibition of unreimbursed employee deductions continue, with particular exceptions offered to qualified personnel across specific occupations.
Opportunities for Self-employed Individuals: Entrepreneurs remain eligible for deductions on business-related vehicle use via Schedule C, with potential to account for business-use interest on auto loans.
Heavy SUVs and Deduction Advantages: Heavier vehicles exceeding 6,000 pounds but under 14,000 pounds open opportunities for substantial tax deductions through Section 179 and bonus depreciation avenues. The lifecycle of such a vehicle bears implications on recapturing initially claimed deductions, urging cautious tax planning.
For professional guidance on optimizing your vehicle-related tax deductions and understanding their implications on tax strategies, contact our office in Coral Gables, Florida, where expert advice and strategic insights are just a call away.
Educator's Deduction Reform: Key Changes Under OBBBA
The One Big Beautiful Bill Act (OBBBA) introduces significant enhancements for educators' tax deductions starting in 2026, offering both strategic opportunities and planning considerations for educators who qualify. With the reinstated itemized deduction for qualified unreimbursed expenses, educators have a broader spectrum of financial relief. This is complemented by the retention of the $350 above-the-line deduction, allowing educators to maximize their tax benefits by selectively allocating expenses between these avenues.
Understanding the nuances of these changes is crucial for educators and financial advisors alike. The dual-option deduction strategy can potentially enhance tax efficiency, thereby aligning with broader financial planning goals.
At NR CPAs & Business Advisors, based in Coral Gables, Florida, our expertise in tax preparation and planning provides invaluable support to educators navigating these changes. Our comprehensive approach, combined with personalized advice from our experienced team, ensures compliance and optimization in line with the latest tax legislations.
Given these updates, it is imperative to engage with seasoned professionals to fully leverage your deduction strategies. Contact us today to streamline your tax planning under OBBBA's new guidelines and maximize your deductions for upcoming tax years.
