Tax Cuts and Jobs Act of 2017: New Qualified Business Income Deduction (Section 199A)

The Tax Cuts and Jobs Act (“TCJA”) covers many provisions that are important for business owners and tax professionals to understand. The Act applies to Corporations, S corporations, partnerships (including limited liability companies or LLCs), and sole proprietorships. The TCJA includes changes to deductions (such as the qualified business income (“QBI”) deduction), depreciation, expensing, credits, fringe benefits as well as several other items that may affect the bottom line or the business’s tax liability.

The new QBI deduction, or section 199A deduction, allows many sole proprietors and self-employed individuals, partners in partnerships, beneficial owners of trusts, and shareholders in S corporations to deduct up to 20 percent of their qualified business income. The QBI deduction will not include employee wages, capital gain, or interest and dividend income. So, if you are self-employed as the owner of your own business and take a salary, that salary will not be included in the new QBI deduction.

This deduction is available for eligible taxpayers whose 2018 taxable income falls below $315,000 for joint returns and $157,500 for other taxpayers. This is generally equal to: the lesser of 20 percent of their QBI plus 20 percent of their qualified real estate investment trust dividends and qualified publicly traded income; or 20 percent of taxable income minus net capital gains.

This section 199A deduction is available for the 2018 tax year. Eligible taxpayers were able to claim this deduction for the first time on 2018 federal income tax returns, and until a new update, will be able to continue claiming in subsequent years.