What is the Qualified Business Income Deduction?
Also known as the section 199A deduction it was part of the 2017 Tax Cuts and Jobs Act. Section 199A of the Internal Revenue Code provides a deduction for qualified business income from a qualified trade or business operated directly or through a pass-through entity. The deduction has two components.
Component 1 - Eligible taxpayers may be entitled to a deduction of up to 20 percent of qualified business income ("QBI") from a domestic business operated as a sole proprietorship or through a partnership, S corporation, trust or estate. For taxpayers with taxable income that exceeds $315,000 for a married couple filing a joint return, or $157,500 for all other taxpayers, the deduction is subject to limitations such as:
the type of trade or business,
the taxpayer’s taxable income,
the amount of W-2 wages paid by the qualified trade or business and the unadjusted basis immediately after acquisition ("UBIA)" of qualified property held by the trade or business.
Income earned through a C corporation or by providing services as an employee is not eligible for the deduction.
Component 2 - Eligible taxpayers may also be entitled to a deduction of up to 20 percent of their combined qualified real estate investment trust ("REIT") dividends and qualified publicly traded partnership ("PTP") income. This component of the section 199A deduction is not limited by W-2 wages or the UBIA of qualified property.
The sum of Component 1 and 2 is referred to as the combined qualified business income amount. Generally, this deduction is the lesser of the combined qualified business income amount and an amount equal to 20 percent of the taxable income minus the taxpayer’s net capital gain. The deduction is available for taxable years beginning after Dec. 31, 2017. Most eligible taxpayers will be able to claim it for the first time when they file their 2018 federal income tax return in 2019. The deduction is available, regardless of whether an individual itemizes their deductions on Schedule A or takes the standard deduction.
Who may take the section 199A deduction?
Individuals, trusts and estates with qualified business income, qualified REIT (real estate investment trust) dividends or qualified PTP (publicly traded partnership) income may qualify for the deduction.
How does Section 199A apply to S corporations and partnerships?
S corporations and partnerships report each shareholder’s or partner’s share of QBI, W-2 wages, UBIA of qualified property, qualified REIT dividends and qualified PTP income on Schedule K-1. From their K-1 the shareholders or partners determine their deduction.
What is qualified business income (QBI)?
QBI is the net amount of qualified items of income, gain, deduction and loss from any qualified trade or business. Only items included in taxable income are counted and the items must be connected with a U.S. trade or business. Capital gains and losses, certain dividends and interest income are excluded.
What is a qualified trade or business?
A qualified trade or business is any trade or business, with two exceptions:
Exception 1 - Specified service trade or business (SSTB), which includes a trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, investing and investment management, trading, dealing in certain assets or any trade or business where the principal asset is the reputation or skill of one or more of its employees. This exception only applies if a taxpayer’s taxable income exceeds $315,000 for a married couple filing a joint return, or $157,500 for all other taxpayers.
Exception 2 - Performing services as an employee