Unit Three – The Limitations Learning Objectives After completing this Unit, you will be able to: › ›
Learn how to calculate the W-2 Wage/Basis Limitation ›
I.
Understand the limitations on the §199A deduction.
Understand the application of Taxable Income limitation
Overview – A taxpayer's §199A deduction may be limited by two
limitations: A. W-2 Wage/Basis Limitation – The §199A deduction may be limited by the taxpayer’s share of the greater of the “W-2 Wage/Basis Limitation” which is the greater of (i) the amount determined under the “wages test” or (ii) the amount determined under the “wages plus basis test”. B. The Taxable Income Limitation – The §199A deduction of a taxpayer cannot exceed an amount equal to 20 percent of the excess (if any) of the taxable income of the taxpayer for the taxable year, over the net capital gain of the taxpayer for such taxable year.
II.
The W-2 Wage/Basis Limitation. A.
Overview.
1. Above certain threshold amounts2, the § 199A deduction is limited by the “W-2 Wage/Basis Limitation” which is equal to the taxpayer’s share of the greater of: (I) 50 percent of the W-2 wages with respect to that trade or business (the “wages test”), or (II) 25 percent of the W-2 wages with respect to that trade or business plus 2.5 percent of the Unadjusted Basis of Qualified Property with respect to that trade or business (the “W2 Wage/Basis Limitation”). 2. Within the so-called “phase in range”3 the W-2 Wage/Basis Limitation phased in as the level of that taxpayer’s income increases 2The term “threshold amount” means, for any taxable year beginning before 2019, taxable income of $157,500 (or $315,000 in the case of a taxpayer filing a joint return). This figure will be adjusted by a cost-of-living adjustment on an annual basis. 3 The “phase-in range” means a range of taxable income, the lower limit of which is the threshold amount, and the upper limit of which is the threshold amount plus $50,000 (i.e., taxable income of between $157,500 and $207,500)or $100,000 in the case of a joint return(i.e., between taxable income between $315,000 and $415,000).
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