The New Deduction for Qualified Business Income
One of the most complex and impactful provisions in the Tax Cuts and Jobs Bill of 2017 (TCJB) is the new deduction for Qualified Business Income (QBI) (Internal Revenue § 199A). In general, for tax years beginning after 2017, a deduction is allowed for 20 percent of the taxpayer’s income from pass-through entities (partnerships, limited liability companies and S corporations) and sole proprietorships. This deduction applies to taxable years 2018-2025. The QBI deduction is not a deduction for Adjusted Gross Income (page 1 of Form 1040) not an itemized deduction. Rather, the QBI deduction is deducted FRM adjusted gross income, but is not an itemized deduction.
What is a Qualified Business?
QBI must be derived from a qualified business, which includes businesses conducted as a sole proprietor and flow through income from partnerships, limited liability companies and S corporations. It does not include performance of services by an employee. A qualified trade or business does not include specified services trades or businesses. These are defined as performance in the services of health, law, accounting, actuarial sciences, performing arts, consulting, athletics, financial services, brokerage services or any business where the principal asset is the reputation of an employee or owner. Note that income earned by architects and engineers is from a qualified trade or business.
This exclusion does not apply to specified service trades or businesses if taxable income of the taxpayer does not exceed $315,000 (married filing joint) or $157,000 (others). These amounts will be indexed for inflation in future years. The exclusion is phased out above these limits on a prorate basis over a $100,000 (joint) or $50,000 (others) range.
What is Not Qualified Business Income?
QBI does not include investment income, guaranteed payments to partners or payments paid to a partner in a capacity other than serving as a partner. It also does not include reasonable compensation paid to an owner and income earned in foreign countries.
For an extended review of the New Tax Law, read the full article HERE in the Spring/Summer 2018 issue of Tools for Success magazine. You can also pick up a print copy of the magazine at a Progress Bank location near you. Click for a complete list of LOCATIONS.
