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Pass-through businesses and deductions

If you are a small business owner, the Tax Cuts and Jobs Act likely created some tax-related questions for you. You may be wondering, for example, how to determine your business income deductions under Section 199A.

What is the qualified business income deduction?

The qualified business income deduction allows owners of qualified trades and businesses to deduct up to 20 percent of qualified business income (QBI) from a sole proprietorship, partnership, S-corporation, trust and/or estate. Standard deductions reduce once income reaches $315,000 for a married couple and $157,000 for an individual filer.

Individual taxpayers (or married couples), trusts, and estates with qualified business income are all eligible for the deduction.

What is “qualified business income”?

QBI is the net of income, deductions, gains and losses of a trade or business. In order to qualify as QBI, items must connect to a domestic trade or business and included in taxable income, with the exception of capital gains/losses, dividends and interest income.

Exceptions to the “qualified trade or business” requirements

Some specified service trade or business (SSTB) do not qualify for the 20 percent pass-through deduction. These types of businesses are specialized and skill-based, relying on the experience, knowledge and skill of at least one of the company’s founders or partners.

Examples of SSTBs include:

  • Health-related businesses (a pediatrician’s office, specialty clinic or partnership of orthopedic surgeons, for example)
  • Consultants
  • Accounting/financial planners/financial service businesses
  • Legal businesses

An SSTB generally qualifies for the deduction unless the taxpayer’s income is in excess of $315,000 for a married couple filing jointly or $157,000 for an individual.

Those performing services as an employee also do not qualify.

Consulting with a tax professional now can help you avoid some business income and deduction-related headaches come tax time.

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