2018 Tax Update: Part II -The New QBI Deduction for S-Corporations and Other Pass-Through Entities

This is the second article in a four part series of articles about the 2018 tax law changes and how they will affect individual and business returns filed in 2019. You can access the first article, General Changes to Individual Returns, here.

As you might have heard, the Tax Cuts and Jobs Act passed in December of 2017 substantially changed many items of the tax structure for both corporate and individual income tax returns.

Chief among the corporate changes was a major tax cut for normal C-corporations (the traditional corporate structure in the US), moving the tax rate from a maximum of 35% to a FLAT rate of 21%.

That’s great news if you are the shareholder of a C-corporation, but what about all the small businesses out there? The vast majority of small businesses in the US are organized as S-Corporations, Partnerships, or another type of Pass-Through Entity. Congress realized that these businesses did not benefit from the new reduced rate for C-corps and thought it appropriate to add a corollary benefit for these types of business structures.

In comes the new Sec. 199A Qualified Business Income (QBI) Deduction. This deduction is available to all pass-through business types and will be applied on the shareholder or individual level.

Very simply put, the new deduction will be calculated by taking 20% of total qualified business income and reducing taxable income (not AGI) by that amount. We won’t get into the actual mechanics of the deduction here since it can get complicated depending on your personal filing status and income level, and whether or not the primary business activity classifies your entity as a “specified service business” (SSB). Some limitations and exclusions will apply but suffice it to say, many small businesses will qualify for the new deduction.

Feel free to reach out if you have any specific questions or would like to review how the new QBI deduction may apply to your individual situation.

This is general information and a brief summarization of complicated tax issues which are often subject to many exclusions and limitations. We make every effort to verify the accuracy of all information but we do not guarantee or warranty advice disseminated over the internet. Please give us a call to discuss potential strategies and ensure they make sense for your specific situation.