The Tax Cuts and Jobs Act of 2017 includes a 20% Qualified Business Income Deduction (QBID). This deduction was included to bridge the gap between traditional corporations and flow-throw entities resulting from the reduction of the corporate tax rate. Owners who qualify for the deduction can reduce their taxable income by 20%. This means that the deduction is applied to the net business income after expenses are deducted. This QBI Deduction is only applicable to owners of flow-through entities such as partnerships, LLCs, S-Corporations, and Sole Proprietorships. Certain income items are excluded from this deduction, such as capital gains, capital losses, and certain types of dividends and income from interest. This exclusion results from capital gains and investment income already being taxed at preferential rates.
The income from these entities must come from a qualified trade or business. A qualified trade or business is any Section 162 trade or business that is not a C-Corporation, a Specified Service Trade or Business, or a trade or business of performing services as an employee. The deduction does not apply to Specified Service Trades or Businesses (SSTBs). A SSTB is a trade or business where the main resource the firm has to offer is based on the reputation or skill of its owners or employees. Specifically listed SSTBs are businesses that practice accounting, health, law, actuarial science, performing arts, consulting, athletics, financial services, investing, and trading. This exception only applies for couples filing a joint return with income more than $315,000 and any other filers with income over $157,500. As a result, the effective tax rate on this business income is greatly reduced.
If you want more information on business income deductions, or need help with your taxes, please contact or call us at (201) 692-1600.
