Tax Cuts and Jobs Act: New 20% Deduction for Qualified Business Income of Pass-Thru Entities

Tax Cuts and Jobs Act: New 20% Deduction for Qualified Business Income of Pass-Thru Entities

The recently enacted tax reform includes a new deduction for qualified business income (QBI) of pass-thru entities. The following highlights key points regarding this new deduction:

  • Qualified business income (QBI) for any taxable year basically means the net amount of “ordinary” income less ordinary deductions. It does not include wages you earn as an employee or guaranteed payments you receive from the qualified trade or business.
  • The deduction is not available to any trade or business involving the performance of services including but not limited to health, law, accounting, consulting, etc. (it is available to architecture and engineering services) unless your taxable income is below the limitation threshold.
  • The deduction is available to taxpayers other than corporations (this appears to include S-corporations, partnerships, trusts, estates and self-employed individuals).
  • It appears that the deduction will be required to be computed with respect to each separate business.
  • The deduction equates to approximately 20% of QBI for each qualified trade or business subject to limitations.
  • The limitations are based on your allocable share of W-2 wages and/or unadjusted basis in qualified property.
  • The limitations are phased in for single taxpayers with taxable income over $157,500 ($315,000 for joint filers).

We are ready to help you with determining the impact of this potentially large tax savings benefit on your current structure as well as considering planning alternatives to maximize the benefit to you. Please reach out to us so we may begin this process.