Qualified Business Income

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Need Info on Qualified Business Income?

A lot of people have been asking about Qualified Business Income recently and one of our authors, Paul Winn CLU ChFc  has nicely offered us an excerpt
from his course Tax Cuts and Jobs Act -Individual Tax Preparation.

Qualified Business Income
– Excerpt from Tax Cuts and Jobs Act Course by Paul Winn

Nature of the 20% Deduction for Qualified Business Income

Section 199A of the Internal Revenue Code added a deduction as a result of the passage of The Tax Cuts and Jobs Act of 2017 of up to 20% for qualified business income derived from a qualified trade or business.

Two components comprise the deduction for which taxpayers may be eligible:

  1. A deduction of up to 20% of qualified business income from a domestic business, subject to limitations based on –
  • the type of trade or business,
  • the taxpayer’s taxable income,
  • the amount of W-2 wages paid by the trade or business, and
  • the unadjusted basis immediately after acquisition (UBIA) of qualified property held by the trade or business.; and
    1. A deduction of up to 20% of the taxpayer’s combined qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income.

The total of the qualified business income, referred to in item 1, and the REIT and PTP income in item 2 is referred to as the “combined qualified business income amount.” The deduction is generally equal to the lesser of:

  1. The combined qualified business income amount; and
  2. The taxpayer’s taxable income reduced by the taxpayer’s net capital gain.

Deduction Eligibility

Pursuant to the provision of the TCJA creating the deduction, taxpayers who may be eligible for the deduction are those who operate a business as a sole proprietor or through a pass-through entity. Accordingly, individuals, trusts and estates with qualified business income, qualified REIT dividends or qualified PTP income may qualify for the deduction. Income earned as an employee or through a C Corporation is ineligible for the deduction.

Eligibility for the pass-through deduction authorized by the TCJA does not require that the taxpayer choose to itemize tax deductions. Accordingly, eligibility for any pass-through deduction is unaffected by the taxpayer’s election to itemize deductions or take the standard deduction.

Pass-Through Deduction for Qualified Trade or Business

The TCJA, §11011, provides for a deduction of up to 20% of a pass-through business’ qualified business income. The deduction, depending upon the amount of qualified business income and other factors affecting it, may reduce the taxpayer’s income tax liability significantly. However, the “other factors” that affect the deduction include:

  • Whether the business is a qualified trade or business;
  • The taxpayer’s taxable income if the business is a specified service trade or business;
  • The amount of W-2 wages paid; and
  • The value of qualified property.

The amount of the pass-through deduction is equal to:

  1. The lesser of A or B, where:

A is 20% of the combined qualified business income; and

B is the greater of –

  • 50% of W-2 wages paid, or
  • 25% of W-2 wages paid + 2.5% of unadjusted basis of qualified property

plus

  1. 20% of the total amount of the taxpayer’s qualified REIT dividends and qualified publicly traded partnership income for the taxable year.

Thus, critical to an understanding of the pass-through deduction are the definitions of:

  • Pass-through business;
  • Qualified trade or business;
  • Qualified business income;
  • Combined qualified business income; and
  • Qualified property.

Let’s consider each of these definitions.

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