Tax Reform Series 21 – Qualified Business Income Deduction (Passthrough Deduction)

Plain Language of Change:

  • An individual taxpayer may deduct up to 20% of qualified business income from partnership, S corporation or sole proprietorship for tax years 2018 through 2025
  • The deduction amount can not be more than the taxpayer’s taxable income reduced by net capital gains
  • No limitation if taxable income is less than $315,000 for married filing joint taxpayers or $157,500 for all other taxpayers.
  • For taxpayers (other than specified service businesses) above these thresholds then the deduction is the lesser of:
    • 20% of the taxpayer’s qualified business income; or
    • a “W-2 wages/qualified property limit” which is the greater of:
      • 50% of the W-2 wages of the trade or business; or
      • the sum of 25% of W-2 wages plus 2.5% of the unadjusted basis of all qualified property of the trade or business
  • The limitation is phased in for amounts over the threshold. The phase in is applicable to $100,000 over the threshold amount for married filing joint and $50,000 for all other taxpayers
  • Taxpayer’s in certain specified service trade or business is further limited.
  • A specified service business is generally one in the fields of accounting, actuarial science, athletics, brokerage services, consulting, financial services, health, law, performing arts, investing, investment management or whose principal asset is the reputation or skill of one or more of its employees or owners. Architecture and engineering are not specified service businesses.
  • The limitations apply to specified service businesses for taxable income below $415,000 for married filing joint or $207,500 for all other taxpayers.
  • The qualified business income deduction is eliminated once income exceeds these thresholds
  • The thresholds are indexed for inflation after 2018
  • Qualified business income is net of business losses
  • A net business loss is carried forward for qualified business income deduction purposes

Detailed Analysis of Qualified Business Income Deduction

Cordasco & Company PC is a boutique CPA firm specializing in federal and state tax issues. We provide customized tax and accounting services specifically designed to help our clients capitalize on the rapidly changing tax and accounting environments.

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