20% Deduction for Pass-Through Entities

May 30, 2018

There is a new provision under the tax law that allows for a 20% write-off for the qualified business income of pass-through entities.  The provision was created in an attempt to put businesses on a level playing field with the new 21% federal income tax rate for corporations.  To qualify for the new deduction, you must be a partner in a business entity taxed as a partnership, a shareholder of an S corporation, or a sole proprietor engaged in a trade or business. The business must be a U.S. business. 
Certain types of business cannot take the deduction, but only if taxable income exceeds certain limits.  If you are above the limits, who is excluded?  (1) Businesses involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services or brokerage services;  (2) businesses where the business’s principal asset is the reputation or skill of one or more of its employees or owners; and (3) businesses involving the performance of services consisting of investing and investment management, trading, or dealing in securities, partnership interests or commodities.  All other businesses qualify and even the businesses listed here will qualify if you are under the dollar limits.  Note that architects and engineers are specifically allowed to take this deduction, even if their income exceeds the limits.
This is a fairly complicated new area of the law with many rules and limits.  If you would like more information, please contact Scott Novak at our firm.