On December 22, 2017, the president signed into law the tax reform act of 2017 (the Act) — the most significant change to the tax code in 31 years. Among the more significant changes is the creation of a new 20% deduction generally for “qualified business income” received by certain pass-through entities. Under this business-friendly provision, eligible individuals could see their maximum rate of tax on qualifying income reduced from 37% to 29.6%.
Very broadly, the deduction is available to eligible owners of sole proprietorships, S corporations and partnerships (including LLCs and other entities taxed as partnerships) that are qualified trades or businesses with qualified business income. The deduction only applies to certain qualified businesses conducted within the United States and specifically excludes service professions such as doctors, dentists, accountants, financial and investment consultants and brokerage providers, attorneys, artists, athletes and any business where the principal asset is the reputation or skill of one or more employees or owners if certain income limits are exceeded. These eligibility restrictions are complex and require application of a set of tests and analysis more fully addressed in a detailed explanation here.The deduction is also limited in several ways through a series of income limitations based on the taxpayer’s “combined qualified business income,” “qualified property” and W-2 wages. Adding to the provision’s complexity, there is an exclusion to these various limitations for eligible owners of pass-through entities if the owner’s non-wage, taxable income is below $157,000 for single filing taxpayers or $315,000 for taxpayers filing joint returns. For more detail on these income limitations, click here.
If wading through the new tax regulations leaves you feeling overwhelmed, you are not alone. To assist owners of pass-through entities in determining whether they qualify for the new deduction, the Hirschler Fleischer Tax Team has prepared a detailed explanation on eligibility and application of the deduction. Through illustrative examples, the primer breaks down the requirements of the provision into a series of tests, highlighting, in particular:
What constitutes qualified trades or businesses and qualified business income
The application of income limitations and its complications
Key exclusions to the deduction
To learn more about this new Section 199A deduction, contact a member of the Hirschler Fleischer Tax Team.