Qualified Business Income Deduction (20% Deduction for Certain Pass-Through Income)

By Mark Castro, CPA
January 9, 2019

The Tax Cuts and Jobs Act included a provision that may allow an individual to deduct 20% of their domestic qualified business income from a partnership, S Corporation or sole proprietorship (Schedule C or F). This provision is in effect for tax years 2018 – 2025.

For the vast majority of taxpayers (90%) this deduction is calculated as the lesser of:

• 20% of their net business income or
• 20% of their taxable income excluding capital gains

This means that for most taxpayers, the deduction is calculated based on the Simplified Worksheet on page 37 of the 2018 Form 1040 instructions.

For the remaining 10% of taxpayers whose income exceeds $157,500 ($315,000 for joint filers) the deduction will be limited as follows:

• For “specified service businesses” the deduction begins to be phased out once the income limit is reached.
• Specified Service business is defined on page 34 of the 2018 Form 1040 instructions.
• For all other businesses the deduction is limited to:
• 50% of the W-2 wages paid by the business or
• 25% of the W-2 wages paid by the business plus 2.5% of the unadjusted basis of all qualified property

For these taxpayers the deduction is calculated based on worksheets in the newly revised draft 2018 IRS Publication 535 (Qualified Business Income Deduction).

See the Business owners can claim a qualified business income deduction page on the IRS website for more information.