Tax Reform: New 20% qualified business deduction for pass-through entities

The Tax Cuts and Jobs Act (TCJA) has brought on major tax law change that impacts small businesses. The TCJA enhanced some tax breaks, repealed others and modified several deductions that are likely to affect a majority of business owners. Here’s one change.

New 20% qualified business deduction for pass-through entities

The TCJA creates a new 20% qualified business deduction for pass-through entities such as S corporations, partnerships, and sole proprietorships. Here are some of the most important factors:

  • This deduction is subject to a handful of complex restrictions. One restriction phases out the deduction for owners of specified service businesses that have taxable income exceeding $157,500 for single filers and $315,000 for joint filers.
  • Taxpayers with taxable income above those thresholds will see a reduced deduction, subject to special wage and capital limits.
  • Losses will lower your eligible income. Excess losses will carry over to future years, limiting your ability to take the deduction in the future.
  • Qualified property must be tangible property subject to depreciation and available for use in qualified trade of business.
  • Rental property owners may also benefit from the deduction.
  • Calculating the actual deduction can be tricky. It depends upon many factors, including your level of income, profession and the amount your business spends on wages and property acquired during the year.
  • The domestic production activities deduction (DPAD) was repealed in the TCJA for 2018 and subsequent tax years.

Keep in mind that because the new business deduction is complex, the IRS will likely give further guidance on how it will affect businesses.

Planning tip: If you’re an owner of a specified service business and your pass-through income is above the thresholds, try to stay below the taxable income thresholds to fully benefit from this deduction. That may mean deferring income at the end of the year. The deduction phases out above the thresholds and also depends on your type of business, your wages, and the value of your capital assets.

If you have any questions, visit with one of our Tax experts.


Published: 9-13-18