Rule Atlas
IRC § 199A: Business Entity Selection: A Planner's Guide to Pass-Through Taxation
Under IRC § 199A (CFP Board / IRS / SEC), business Entity Selection: A Planner's Guide to Pass-Through Taxation establishes the authoritative rules tested on the CFP® Certification. Master the tax implications of sole proprietorships and S-corporations for the CFP® exam. VoraPrep verifies every threshold, worked table, and practice question below against the current CFP® Certification blueprint.
Current Statutory Thresholds & Limits in Effect
Subject to W-2 wage / UBIA limitations and SSTB phase-outs above statutory taxable income thresholds.
Comparison of Pass-Through Entities
| Feature | Sole Proprietorship | S-Corporation |
|---|---|---|
| Liability | Unlimited personal liability | Limited liability (corporate veil) |
| Tax Reporting | Schedule C (Form 1040) | Form 1120-S; K-1 to owner |
| Employment Tax | Self-Employment tax on 100% of net business income | FICA tax only on reasonable salary |
| Formation | Easiest (no formal action) | Requires filing articles of incorporation & S-election |
| Complexity | Low administrative burden | Higher (payroll, separate tax return, state fees) |
Sarah Davies, a single filer, owns and operates a successful consulting firm, which is classified as a Specified Service Trade or Business (SSTB). For 2026, her taxable income before any Qualified Business Income (QBI) deduction is $190,000, and her Qualified Business Income (QBI) from the firm is $120,000. What is the maximum qualified business income (QBI) deduction Sarah can claim for 2026?
Worked Example: The Power of the S-Corporation
Scenario: Let's return to Maya, who has $200,000 in net business income from her consulting firm. She determines a reasonable salary for her work is $80,000.
- Step 1: Calculate Tax as a Sole Proprietor. The entire $200,000 net income is subject to Self-Employment (SE) tax. SE Tax Base: $200,000 × 0.9235 = $184,700 Social Security Tax (12.4% on first $184,500 for 2026): $184,500 × 0.124 = $22,878.00 Medicare Tax (2.9% on entire base): $184,700 × 0.029 = $5,356.30 Total SE Tax: $22,878.00 + $5,356.30 = $28,234.30
- Step 2: Calculate Tax as an S-Corporation. Maya pays herself an $80,000 salary and takes the remaining $120,000 as a distribution. Only the $80,000 salary is subject to employment taxes (FICA). FICA Tax (15.3% on salary): $80,000 × 0.153 = $12,240.00 The $120,000 distribution is NOT subject to SE/FICA tax.
- Step 3: Compare the Tax Savings. SE Tax (Sole Prop) - FICA Tax (S-Corp) = Savings $28,234.30 - $12,240.00 = $15,994.30
- Therefore, by choosing the S-Corp structure, Maya saves $15,994.30 in employment taxes in the first year alone, making it the superior choice from a tax perspective.
Common CFP® Certification Distractors on IRC § 199A
- 1Pass-through entities like Sole Proprietorships and S-Corps avoid double taxation by passing income directly to the owners' personal returns.
- 2S-Corporations can offer significant self-employment tax savings compared to sole proprietorships but require paying a reasonable salary and involve more administrative complexity.
- 3The Qualified Business Income (QBI) deduction provides a potential 20% deduction on income from pass-throughs but is limited for high-income owners of Specified Service Trades or Businesses (SSTBs).
- 4Entity selection is a critical planning decision that involves balancing tax efficiency, liability protection, and administrative complexity.
Frequently Asked Questions: IRC § 199A
What is the core rule under IRC § 199A (Business Entity Selection: A Planner's Guide to Pass-Through Taxation)?
Under IRC § 199A (CFP Board / IRS / SEC), business Entity Selection: A Planner's Guide to Pass-Through Taxation establishes the authoritative rules tested on the CFP® Certification. Master the tax implications of sole proprietorships and S-corporations for the CFP® exam. VoraPrep verifies every threshold, worked table, and practice question below against the current CFP® Certification blueprint.
How is IRC § 199A tested on the CFP® Certification?
Pass-through entities like Sole Proprietorships and S-Corps avoid double taxation by passing income directly to the owners' personal returns. S-Corporations can offer significant self-employment tax savings compared to sole proprietorships but require paying a reasonable salary and involve more administrative complexity.
Where can I practice CFP® Certification questions on Business Entity Selection: A Planner's Guide to Pass-Through Taxation?
Test yourself instantly with the free playable CFP® Certification question on this page, or launch VoraPrep's full CFP® Certification adaptive question bank, interactive lessons, and 1:1 exam simulator at voraprep.com/cfp.