New Tax Law: Deduction for Qualified Business Income and More.

• Author: Josephs, Stuart R.
• Position: FedTax

For tax years beginning after 2017 and before 2026, under new IRC Sec. 199A, an individual generally may deduct 20 percent of qualified business income from a partnership, S corp or sole proprietorship, as well as 20 percent of aggregate qualified real estate investment trust (REIT) dividends, qualified cooperative dividends and qualified publicly traded partnership income. Special rules apply to specified agricultural or horticultural cooperatives.

This new deduction is allowed only for federal income tax purposes.

A limitation based either on wages paid or on wages paid plus a capital element is phased in above a threshold amount of taxable income A disallowance of the deduction with respect to specified service businesses also is phased in above the threshold amount of taxable income. For purposes of this new deduction, taxable income is computed without regard to the 20 percent deduction.

The new deduction is not allowed in computing adjusted gross income, but is allowed to reduce taxable income so that is available to both non-itemizers and itemizers.

THRESHOLD AMOUNT

The threshold amount is $157,500 or $315,000 for joint returns, indexed for inflation for tax years beginning after 2018.

The range over which the phase in of the limitations on specified service businesses, wages and capital applies is $50,000 or $100,000 for joint returns.

Adjustment

If taxable income exceeds the threshold amount but does not exceed $207,500, or $415,000 for joint returns, and if the W-2 wages/qualified property limitation for a qualified business, discussed below, is less than 20 percent of the qualified business income for that business, then:

1. The W-2 wages/qualified property limitation does not apply for that business; and

2. The 20 percent tentative deduction for the qualified business income from that business is reduced by the following computation:

   (1) Subtract the W-2 wages/qualified property limitation from that 20 percent tentative deduction; and

   (2) Multiply the result obtained under (1) immediately above by the following fraction:

   [Taxable income exceeding the threshold]/$50,000 ($100,000 for joint returns)

   Example: H & W file a 2018 joint return reporting $345,000 taxable income. H has a qualified business that is not a specified service business (discussed immediately below), has qualified business income of $75,000 and $20,000 of W-2 wages. (For illustrative simplicity, there is no qualified property.)

   The $15,000 tentative deduction...