Qualified Business Income Deduction: The New 20-percent Deduction for Pass-through Businesses

The 2017 Tax Cuts and Jobs Act, often called “the new tax bill” offers significant tax cuts for businesses. While these tax cuts for large corporations have been well-publicized, there are also deductions for small businesses. If you operate a sole proprietorship, partnership, or S Corporation, you will want to become familiar with the Qualified Business Income Deduction,  which went into effect on January 1, 2018.

What is the Qualified Business Income Deduction?

Section 199A of the Internal Revenue Code provides many taxpayers with a deduction for qualified business income from a qualified trade or business operated directly or through a pass-through entity. The deduction has two components.

  • Eligible taxpayers may be entitled to a deduction of up to 20 percent of qualified business income (QBI) from a domestic business operated as a sole proprietorship or through a partnership, S corporation, trust or estate. There are income limitations that may reduce this deduction.
  • 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.

How do S corporations and partnerships handle the deduction?

S corporations and partnerships are generally not taxpayers and cannot take the deduction themselves. However, all S corporations and partnerships pass income to the shareholders.  This is reported on Schedule K-1 of your tax return, where it will allow individuals to claim the deduction.

For more information on how this may impact your business, please contact us to set up an appointment.