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Do You Qualify for the 20% Deduction for Qualifying Business Income?

January 31, 2019

Among the changes that resulted from the Tax Cuts and Jobs Act, Congress reduced the top tax rate for "C" corporations from 35% to a flat rate of 21%, so it felt certain types of business income from pass-through entities (e.g., S corporations, Partnerships, Sole Proprietors, Trusts, and Estates), and the income of certain Cooperatives, should also get some form of tax rate reduction.

However, instead of providing a lower tax rate for this type of business income, the New Law created a new 20% deductions that is generally provided to non-corporate taxpayers receiving qualifying income.

Income Qualifying for the 20% Deduction

The following types of income generated by partnerships, S corporations, sole proprietorships, trusts, and estates may qualify for the 20% deduction: “Qualified Business Income,” “Qualified Cooperative Dividends,” “Qualified REIT Dividends,” and “Qualified Publically-Traded Partnership Income.” Please note that, of these four types of qualifying income, the most common will, in all likelihood, be “Qualified Business Income” (QBI). Consequently, the remainder of this discussion focuses only on QBI.

“Qualified Business Income.”

“Qualified Business Income” (QBI) is generally defined as the net amount of qualified items of income, gain, deduction, and loss with respect to “any” trade or business other than:

  1. Certain personal service businesses known as “Specified Service Trade Or Businesses” (described in more detail below), and
  2. The trade or business of performing services “as an employee.”

QBI does not include:

  1. Dividends, investment interest income, short term capital gains, long term capital gains, income from annuities, commodities gains, foreign currency gains, etc.,
  2. Reasonable compensation paid by a Qualified Trade of Business for services rendered to the taxpayer claiming the 20% deduction,
  3. Any “guaranteed payment” paid to a partner for services actually rendered to or on behalf of the partnership, or
  4. To the extent provided in regulations, any amount allocated or distributed by a partnership to a partner who is acting other than in his or her capacity as a partner for services rendered to a partnership.

To read the full white paper including information for calculating the amount of a taxpayer's 20% deduction for a "Qualified Trade or Business Income" please visit the resources section of the Davis & Hodgdon website.