The Tax Cut and Jobs Act creates a new deduction under code section 199A for Qualified Business Income.

Prior Law

Through December 31, 2017

Prior to the new law, income from pass-through and sole proprietorship businesses was taxed using ordinary income tax rates applicable to all individual income.

New Law

Effective for tax years beginning after December 31, 2017

The deduction under the new law is generally 20% of income, gain, deduction and loss relating to qualified trade or business income of a taxpayer. There are limits to the deduction for most taxpayers based on W-2 wages of the applicable trade or businesses and/or the basis of the qualified property of the business. The deduction is also not allowed for certain types of businesses (such as personal service businesses), although exceptions apply if income is below certain thresholds. The deduction reduces taxable income as opposed to adjusted gross income (AGI), which is relevant to various phase-out limits of other deductions often based on AGI.

Commentary

This deduction is a mechanism to pass additional tax rate reductions to businesses taxed on individual tax returns. Many small businesses have their income taxed on individual returns subject to individual tax rates and were therefore receiving a much smaller tax reduction than C corporations which had most rates cut from 35% to 21%. The basic deduction is straightforward but the limitations add a level of complexity to the process.

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Jeff Dvorachek
Jeff Dvorachek
I joined Hawkins Ash CPAs in 1998. I am the partner-in-charge of the Manitowoc, WI, office and tax director for the firm. I have thorough experience providing tax services to individuals, commercial businesses, nonprofit entities and estates and trusts. I also provide compilation and review services. I lead the Tax Committee and am a member of the Information Technology Advisory Committee.

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