The New 20 Percent Deduction for Pass-through Businesses
Wolters Kluwer Reviews a Significant New Tax Break for Owners of Pass-through Businesses
(NEW YORK, NY, March 2019) — The most significant new tax break in the Tax Cuts and Jobs Act affecting individual taxpayers is the 20 percent deduction from qualified business income for noncorporate owners of pass-through businesses. This affects partners in partnerships, shareholders in S corporations, sole proprietors, estates and trusts, cooperatives, and Real Estate Investment Trusts (REITs). The IRS estimates that it will be available to as many as ten million taxpayers on 2018 tax returns.
“Although a potentially very attractive tax break, it can also be complicated, making it a good idea to consult with a tax professional to take maximum advantage of the deduction,” said Mark Luscombe, JD, LLM, CPA and Principal Federal Tax Analyst for Wolters Kluwer Tax & Accounting.
The following are some of the more significant elements in determining eligibility and calculating the 20 percent deduction:
- The Basic Calculation
The deduction is the lesser of the taxpayer’s combined qualified business income or 20 percent of the excess of taxable income over net capital gain. Combined qualified business income (QBI) is the sum of the deductible amount of QBI from all qualified businesses of the taxpayer, plus 20 percent of the taxpayer’s aggregate qualified REIT dividends and qualified income from publicly-traded partnerships. The deduction appears on line 9 of Form 1040 but requires information from the businesses to calculate the deduction.
- The Threshold Amounts
The 20 percent deduction is available for all pass-through trades or businesses of the taxpayer up to a threshold amount for 2018 of taxable income of $315,000 for married filing jointly filers and $157,500 for other filers.
- Qualified Business Income
QBI is the net amount of qualified items of income, gain, deduction, and loss from a qualified trade or business, excluding reasonable compensation, guaranteed payments to partners for services, and other payments to partners for services treated as paid to a non-partner. QBI does not include capital gains or losses, dividends, interest, and other amounts not property-allocable to the trade or business.
- Specified Service Trades or Businesses
For specified service trades or businesses (SSTBs), the deduction phases out over the next $100,000 of taxable income for joint filers and $50,000 of taxable income for other filers. SSTBs involve services in a variety of professional fields or any trade or business whose principal asset is the reputation or skill of one or more of its employees or owners. SSTBs also include investing and investment management and trading or dealing in securities, partnership interests, or commodities.
For non-SSTBs, the availability of the deduction above the threshold depends on the amount of W-2 wages and the unadjusted basis immediately after acquisition (UBIA) of qualified property.
- Proposed and Final Regulations
Treasury and the IRS issued proposed regulations in August 2018, and final regulations in January 2019. The IRS has stated that taxpayers may rely on either the proposed regulations or the final regulations for the 2018 tax year.