Deduction for qualified business income

The Tax Cuts and Jobs Act creates a new deduction for qualified business income from sole proprietorships, partnerships and S corporations and limited liability company (LLC) members who receive pass-through income.

The new deduction will cover up to 20 percent of the qualified business income of an eligible taxpayer. Qualified business income is the net amount of income, gain, deduction and loss from a qualified company, provided the items are effectively linked to the conduct of the company in the USA. However, certain investment items, including capital gains and losses, dividends or interest income not allocated to the business, are not taken into account.

The deduction applies to income from any type of trade or business. Certain specified service businesses receive a deduction as long as taxable income for the year is less than $315,000 on a joint return or $157,500 on all other returns. A partial deduction remains available until taxable income reaches $415,000 on a joint return or $207,500 on other returns.

Specified service businesses are those that involve the performance of service health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, or any trade or business where the principal asset is the reputation or skill of one or more of its employee owners. Specified service businesses also include any business that involves the performance of services that consist of investing and investment management, trading or dealing in securities, partnership, interests or commodities.