Sustainable Organizations → Finance

Qualified Business Income Deduction


Description
One of the more important provisions in P.L. 115-97, known as the Tax Cuts and Jobs Act, enacted Dec. 22, 2017, is new Sec. 199A, the deduction for qualified business income (QBI). Sec. 199A allows a deduction for up to 20% of QBI from partnerships, limited liability companies (LLCs), S corporations, trusts, estates, and sole proprietorships.

Sec. 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 Sec. 199A deduction is taken at the partner, S corporation shareholder, estate and trust, or sole proprietor level for tax years beginning after Dec. 31, 2017.

Most 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. These steps are discussed below. Calculations involving cooperative dividends, real estate investment trust (REIT) dividends, publicly traded partnership (PTP) income, and agricultural and horticultural cooperatives are beyond the scope of this article.
Content
  • About the Instructor
  • Learning Objectives
  • QBI Deduction - The Basics
  • Define Key Terms
  • Items Specifically Excluded from QBI
  • Who Benefits From This QBI Deduction?
  • Why would You do this to Me?
  • C-Corp Tax Rates
  • S-Corp Tax Rates (IND)
  • How to Calculate the Section 199A Deduction
  • Example of QBI Deduction
  • Example of QBI Deduction continued
  • Complications for High Earners
  • Example #1 of High Earner
  • Example #2 of High Earner
  • Recap of Rules
  • Steps in Determining the Section 199A Deduction
  • QBI Flow Chart
Completion rules
  • All units must be completed