The Tax Cuts and Jobs Act of 2017 (TCJA) contains a new tax benefit, providing taxpayers with a deduction of up to 20% of qualified business income (QBI) from a qualified trade or business that is operated as a sole proprietorship, partnership, or S-corporation.
The IRS defines a qualified trade or business as every trade or business other than:
- the trade or business of performing services as an employee, and
- any trade or business involving the performance of services in the fields of health, law, engineering architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, or brokerage services.
While this provision can be complex for taxpayers with taxable income above $157,500 in 2018, or $315,000 on a joint return, it is relatively straightforward for taxpayers with taxable income below these thresholds.
For example, a taxpayer with $140,000 of QBI can deduct $28,000 (20% of $140,000) from their taxable income.
Entities eligible for deduction (listed by entity and tax return filed):
- Sole Proprietorship — Schedule C of Form 1040 (U.S. Individual Income Tax Return)
- Partnership — Form 1065 (U.S. Return of Partnership Income)
- S-Corporation — Form 1120S (U.S. Income Tax Return for an S Corporation)
Over the Limits
For taxpayers with taxable income in excess of $157,500, or $315,000 for joint filers, the qualified business income deduction is limited to the greater of:
- 50% of W-2 wages paid by the qualifying trade or business, OR
- the sum of 25% of W-2 wages paid, plus 2.5% of the unadjusted basis immediately following acquisition of all qualified property.
These taxpayers must begin by determining their deduction separately for each qualified trade or business, and then compare this amount to the limitation described above. The lesser of the amount calculated and the deduction limitation is the QBI deduction.
Dillon Wright is a certified public accountant (CPA) and owner of Wright Accounting & Consulting, L.L.C. He provides accounting, consulting, and tax planning services to individuals and business owners with ties to the Shreveport/Bossier community.