Qualified Business Income Deduction!
As a result of the tax reform legislation passed in December 2017, eligible taxpayers may be able to deduct up to 20 percent of certain business income from domestic businesses operated as sole proprietorships, pass through entities, such as partnerships, S corporations, trusts, and estates.
The deduction for qualified business income, also known as the section 199A deduction, has two components:
1. Eligible taxpayers may be entitled to a deduction of up to 20 percent of qualified business income (QBI). For taxpayers with taxable income that exceeds $315,000 for a married couple filing a joint return, or $157,500 for all other taxpayers, the deduction is subject to limitations, such as:
the type of trade or business
the taxpayer’s taxable income
the amount of W-2 wages paid by the qualified trade or business
the unadjusted basis immediately after acquisition (UBIA) of qualified property held by the trade or business.
2. Eligible taxpayers may also be entitled to a deduction of up to 20 percent of their combined qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income. [This component is not limited by W-2 wages or the UBIA of qualified property].
The sum of these two components are referred to as the combined qualified business income amount.
What is qualified business income (QBI)?
QBI is the net amount of qualified items of income, gain, deduction and loss from any qualified trade or business. Further, the items must be connected with a U.S. trade or business. Items such as capital gains and losses, income earned through a C corporation, certain other dividends and interest income, or income earned as an employee are excluded.
What is a qualified trade or business?
A qualified trade or business is any trade or business. However, there is an important exception for the purpose of this deduction:
Specified service trade or business (SSTB), this includes a trade or business involving the performance of services in specialized areas of health, law, accounting, actuarial science, performing arts, consulting, financial services, investing, investment management, trading, dealing in certain assets, athletics, or any trade or business where the principal asset is skill or reputation of its workers. Though, this exception only applies if a taxpayer’s taxable income exceeds $315,000 for a married couple filing a joint return, or $157,500 for all other taxpayers. These limitations are phased in for joint filers with taxable income between $315,000 and $415,000, and all other taxpayers with taxable income between $157,500 and $207,500.
How is the deduction for qualified business income computed?
Generally, the deduction is the lesser of:
20 percent of the taxpayer’s QBI, plus 20 percent of the taxpayer’s qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income, aka the combined qualified business income amount, and
20 percent of the taxpayer’s taxable income minus net capital gains.
Eligible taxpayers will be able to claim the deduction for the first time when they file their 2018 federal income tax return in 2019. The deduction is available, regardless of whether the taxpayer itemizes their deductions, or takes the standard deduction.