The IRS has recently issued 184 pages of proposed regulations to clarify this deduction passed as part of last year’s major tax act. Here are some of the highlights:
The deduction is for businesses organized as sole proprietors, partnerships, LLC’s, S corporations, and some trusts. It allows a deduction for 20% of “qualified business income” which means net income from a trade or business before owner compensation. Essentially, it excludes business interest, dividends, and capital gains and losses.
There are two limitations for high income taxpayers. One is based on what you do and the other is based on W-2 wages paid.
The first limitation phases out for taxpayers with income in excess of $315,000 for joint returns and $157,500 for all others. The deduction becomes zero when taxable income reaches $415,000 and $207,500. It applies to the following service businesses – accounting, actuarial science, athletics, brokerage, consulting, financial, health, investment management, law, performing arts, and securities trading and dealing. Specifically excluded are real estate brokers and insurance agents.
The second limitation is incredibly complex and applies to all taxpayers, not just those specified above. The sum of (1) W-2 wages paid by the business (excluding the owner) and (2) the non-depreciated portion of tangible depreciable property used in the business is compared to the 20% deduction and the lesser of the two amounts becomes the amount deductible.