Updated: Feb 25, 2019
On January 18th, the U.S. Treasury issued final regulations on a provision of the Tax Cuts and Jobs Act (TCJA) that allows owners of pass-through entities such as sole proprietorships, partnerships, trusts, and S-corporations to deduct up to 20 percent of their qualified business income on their taxes. The income of these businesses and entities gets passed to their owners and reported on their personal returns.
This is in contrast to a C-Corporation in which the business income gets taxed against the business directly as well as the shareholders being taxed on their personal incomes from the business, such as dividends and distributions.
According to recent US Census reports, it is estimated that roughly 92% of all businesses in the United States are pass-through entities.
To prevent abuse of the deduction, the law excluded certain service businesses from eligibility. The regulations, specifically 26 USC 1202(e)(3)(A), defines these businesses as "any trade or business involving the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees."
If your business is a pass-through entity, but obtains part of its business income from an excluded source, it can still qualify for a limited deduction. The deduction is available to the extent of he final Section 199A deduction, however, equals the lesser of the 20% of the qualified business income (which is what is shown on Form K-1) or 20% of the taxpayer’s taxable income.
The Section 199A deduction, like all deductions and regulations relating to US Federal Taxes, are complex. Make sure you discuss with a qualified CPA or tax accountant your business' qualifications and impact under 199A. If you are interested in establishing a pass-through entity for your business, the Dills Law Firm can guide you through the process.
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