New Deduction for Pass-Through Businesses

Under prior law, net taxable income from pass-through business entities (such as sole proprietorships, partnerships, S corporations and LLCs that are treated as sole proprietorships or as partnerships for tax purposes) was simply passed through to owners. It was then taxed at the owners’ standard rates. In other words, no special treatment applied to pass-through income recognized by business owners.

For tax years beginning in 2018, the TCJA establishes a new deduction based on a noncorporate owner’s qualified business income (QBI). This new tax break is available to individuals, estates, and trusts that own interests in pass-through business entities. The deduction equals 20% of QBI, subject to restrictions that can apply at higher income levels.

QBI is defined as the net amount of qualified items of income, gain, deduction and loss from any qualified business of the noncorporate owner. For this purpose, qualified items are income, gain, deduction and loss that are effectively connected with the conduct of a U.S. business. QBI doesn’t include specific investment items, reasonable compensation paid to an owner for services rendered to the company or any guaranteed payments to a partner or LLC member treated as a partner for services provided to the partnership or LLC.

The QBI deduction isn’t allowed in calculating the noncorporate owner’s adjusted gross income (AGI), but it reduces taxable income similar to an allowable itemized deduction. If you'd like to know more about the new pass-through deduction please contact us at 781-569-4700 or lga@lgallp.com.