One of the more important provisions in the most recent tax overhaul, known as the Tax Cuts and Jobs Act, enacted in December 2017, is the new section 199A, the deduction for qualified business income (QBI). Section 199A allows a deduction for up to 20% of QBI from partnerships, limited liability companies (LLCs), S corporations, trusts, estates, and sole proprietorships.
Section 199A creates a deduction based on an “artificial” calculation of business income instead of actual economic outlays required for most other business deductions. The provision is a significant tax benefit for many noncorporate businesses and was passed in part on the premise that a sizable tax rate cut for C corporations – from a maximum graduated rate of 35% down to a flat 21% rate – justified a corollary tax benefit to non-C corporation businesses. The section 199A deduction is taken at the partner, S corporation shareholder, estate and trust, or sole proprietor level for tax years beginning after December 31, 2017.
Basically, the deduction is equal to the sum of 20% of the QBI of each of the taxpayer’s qualified businesses. The full calculation, however, involves a multistep process that may phase out some or all of the deduction, depending on income level.
