A new 20-percent deduction is available for qualified, pass-through business income. A welcomed relief
to the closely held and/or small business owners. The Qualified Business Income Deduction or Provision
11011 Section 199A of the Tax Cuts and Jobs Act is the provision that allows pass-through entities to
receive the tax reduction benefit offered to C-Corps and other tax paying entities under the Tax Cuts and
Jobs Act. Without this provision, the small business owner representing the vast majority of businesses
would not receive the benefit of the reduced corporate tax rates.
There are a few items to touch on in this article about this new deduction.
1. What is Qualified Business Income (QBI)
2. Who qualifies for the deduction
3. What type of income qualifies and limitations that apply
4. Where is the deduction reported
5. How is the deduction computed
What is QBI – In general, QBI is taxable income from any qualified trade or business resulting from trade
or business within the United States. Capital gains and losses, dividends and interest income are
excluded from QBI. The business income can be generated from a proprietorship, a partnership, or an S
Who qualifies for the deduction – The deduction is taken by individuals, trusts and estates, qualified
REIT dividends or qualified REIT dividends or qualified TPT income.
What type of income qualifies and limitations that apply – This is very large swath and includes any
trade or business, with two exceptions: (1) Specified service trade or business (SSTB); and (2) performing
services as an employee.
A SSTB includes businesses that perform the following services:
Consulting (see definition of Consulting below)
Investing and investment management
Dealing in certain assets
Any business that the principal asset is the reputation or skill of one or more of its employees
The exception for SSTB’s is applicable if the taxpayer’s taxable income exceeds $415,000 for a married
couple filing a joint return, or $207,500 for all other taxpayers. The Section 199A tax deduction is
eliminated when taxable income is greater than this threshold for a SSTB business. The tax deduction is
subject to limitations when taxable income is greater than $315,000/$157,500 and less than the
$415.000/$207,500 threshold. Of course complications arise and require further evaluation when
taxable income is above the limits and business income is composed of both SSTB and non SSTB income.
Another issue is when a business provides 80% or more of its property or services to an SSTB business
and they share 50% or more of a common ownership. In this case the business providing the property
or services to the SSTB is also considered an SSTB.
Definition of Consulting – Consulting income is one of the SSTB’s that could result in limitation or
exclusion of the QBI deduction. So, it is important to understand the definition and if possible how to
classify income different than consulting, if appropriate.
Consulting includes providing advice and counsel to clients in order to achieve goals or solve problems.
This classification also includes activities like lobbying or attempts to influence governmental officials or
legislative bodies. However, consulting and sales are considered different classifications. Sales income is
not included in the list of SSTB’s. The facts and circumstances will determine if the activity should be
classified as sales or consulting.
Where is the deduction reported – Since many of the QBI will be derived from S-Corps, Partnerships and
other entities that are not taxpayers, the QBI is passed through to the partners, members and
shareholders of these entities. These pass-through income sources will require the identification of the
trade or business individually.
The Qualified business income deduction is a below-the-line deduction (applied after the applying the
standard deduction or itemized deductions.) The deduction reduces the total taxable income and is
reported on Page 2, Line 9 of the Form 1040. The deduction does not have a supporting form or
schedule for filing. A simplified worksheet can be found in the 2018 Form 1040 instructions to assist
taxpayers with the calculation.
How is the deduction calculated – Initially the qualified business income (QBI) is determined. This
determination is made separately if multiple qualified businesses are applicable. The QBI is the net
amounts of income, gain, deduction and loss associated with the qualified business. Short-term and
long-term capital gains and losses, dividends and interest income not applicable to the business are not
included in the calculation. Reasonable compensation payments and guaranteed payments made to the
taxpayer for services provided to the qualified business are also excluded.
The deduction is 20% of the QBI. If multiple qualified businesses are applicable the 20% is applied to the
QBI for each business then totaled. When taxable income is below the lower $315,000/$157,500
threshold the 199A deduction is equal to the lessor of (1) 20% of the QBI or (2) 20% of taxable income
minus net capital gains.
When the taxable income is above the lower $315,000/$157,500 limits and depending on the type of
business then additional test and limitations are applied to the deduction calculation.
The concept of the 199A deduction seems fairly simple especially when taxable income is under the
threshold. Complications can be triggered which CPAs can provide further explanation of the rules and
provide tax planning.