Market Law: Section 199A deduction for high earners

I wrote this column and next Sunday’s column primarily for tax professionals. So most New Hampshire business owners may not want to read them. However, these columns can be very useful to New Hampshire business owners who are “high earners” (as defined below) – especially if they file their own federal income tax returns.

Section 199A of the Internal Revenue Code provides an incredibly large annual federal income tax deduction for owners of “intermediate businesses”; the amount of the deduction can be up to 20% of their share of their business income. (As readers may know, “intermediate businesses” include sole proprietorships under state law, most single-person and multi-member limited liability companies, and all state-law business corporations taxable as S corporations) .

As I wrote last week, for most business owners, the Section 199A provision for calculating the deduction is very simple; under section 199A(b)(2)(A), it is 20% of their share of the net business income of their business (i.e. 20% of their business income business after all deductions).

However, the provisions of Section 199A for calculating the high income deduction are much more complex. In this column, I will briefly summarize these provisions. In next Sunday’s column, I will do my best to explain and illustrate in simple language the very complex but also very important intricacies of Section 199A applicable to high earners under Subchapter S of the Internal Revenue Code and of section 199A(b)(3)(B) ).

By high income, I mean single people whose taxable income for 2022 will be equal to or greater than $140,050 and married people whose taxable income in 2022 will be equal to or greater than $340,100.

Under sections 199A(b)(2)(A) and (B) and 199A(b)(3)(B), the high income section 199A deduction will be the lesser of:

The lesser of 20% of their business net business income and the greater of:

If these companies do not own any real estate, 50% of the total salary they pay to their employee; Where

If these companies own real estate, 25% of their overall salary plus 2.5% of the “unadjusted base” of this property in the year they acquired it.

“Unadjusted basis” generally means the amount they paid for the property.

To illustrate the terms of Sections 199A(b)(2)(A) and (B), assume the following:

Joe Doe is married and he files a joint federal income tax return with his wife.

For 2022, his taxable income is $340,101. It thus exceeds the $340,100 above.

It carries out its activities through the intermediary of a one-person limited liability company.

His company does not own any real estate.

He got his business to make an election with the IRS to be taxable for the 2022 tax year as an S corporation. (I’ll explain next week why high earners should generally make this election to their LLC.)

In 2022, his net business income will be $500,000.

In 2022, the amount of aggregate wages his company will pay its employees will be $310,000.

Under the above assumptions:

20% of John’s business net business income for 2022 will be $100,000 (i.e. 20% multiplied by $500,000).

50% of the wages his company pays its employees will be $155,000.

Thus, under sections 199A(b)(2)(A) and (B), his section 199A deduction will be $100,000 (i.e. the lesser of his section 199A(b)(2)(A) and its section 199A(b)(2)(B) deduction).

So simple! But, as discussed next week, in many cases, calculating the Section 199A deduction for high earners will be much more complex.

John Cunningham is an attorney licensed to practice law in New Hampshire and Massachusetts. He is legal counsel for the law firm McLane Middleton, PA. Contact him at 856-7172 or His website is To access all of his Law in the Marketplace columns, visit