One of the best opportunities in the new tax law for business owners in the creative and advertising industry is the new passthrough deduction. Called the 199A deduction, this new law allows business owners a deduction equal to 20% of qualified business income passed through to them from sole proprietorships, single-member LLCs, partnerships, and S corporations.  A 20% deduction can save a lot of tax and leave equity in the business or cash in the pockets of owners.

Not all business income qualifies.  The law lists specific service industries or fields, such as accountants and lawyers, which are not eligible for the deduction if their taxable income exceeds certain levels.

Owners of advertising, marketing, and creative agencies are uniquely positioned to take advantage of this deduction because these fields are not included on the list of fields not eligible for the deduction.

One concern that owners of these agencies may need to consider is the amount of revenue classified as consulting services.  Consulting is included on the list of services not eligible for the deduction.  However, this may not be a deal breaker if consulting revenue makes up a small portion of total revenue.  All a business' income will be considered as eligible if:

  • Gross Receipts are less than $25 million for the year, and
  • Less than 10% of the gross receipts come from consulting.
  • If gross receipts exceed $25 million, the consulting threshold is lowered to 5%.

There are other limitations which need to be considered as well.  The 199A Passthrough deduction is complicated and further guidance is expected from the IRS.  If you have not spoken to your tax adviser about maximizing you 199A Passthrough Deduction at the company or individual level, Delap is here to help.

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Co-authored with Jordon Schultz