3 Things to Know About the New 20-percent Deduction for Pass-through Businesses (Provision 11011 Section 199A)

What Is It

Since the government reduced the tax rate for C corporations to a flat rate of 21% (in 2017 it was a graduated rate from 15% to 38% dependent on taxable income in a C corporation) in the Tax Cuts and Jobs Act (TCJA), it is only fitting that the government reduces taxes for the rest of us business owners, like sole proprietors, LLCs, and S corporations. Don’t you think? So the Qualified Business Income (QBI) Deduction was born. Here’s how the IRS describes the Qualified Business Income deduction and limitations in great detail.

In essence, it is the profit (less gains and interest, etc.) amount that passes through to your Schedule K-1 of your individual tax return. The 20% deduction is based on that QBI amount. This is a really good thing!

Who Gets It

You are entitled to a 20% deduction of QBI from a business operated in the United States if you are a pass-through business such as a sole proprietor, partnership, S corporation, trust, or estate. Of course, there are limitations and they are spelled out on the IRS FAQ page.

For How Long

This deduction is temporary and is in effect for calendar-years from 2018 to 2025. So, enjoy it while you can!