Will My Business Qualify for the New 20 Percent "Qualified Business Income" Deduction?

Under the recently signed Tax Cuts and Jobs Act, Congress added Section 199A, a new provision of the Internal Revenue Code that provides for a potential 20 percent deduction for an individual related to income from pass-through entities and other non-corporate tax structures. The deduction begins in 2018 and is scheduled to end after 2025.

In order to qualify for the new deduction, a taxpayer must 1) own an interest in a "qualified trade or business" that 2) generates "qualified business income". Qualified business income is best defined as the net amount of ordinary (non-investment related) income, gain, deductions and losses that are effectively connected with a trade or business. Generally speaking, if your company is a brick and mortar, capital-based business (with employees, ideally), your business will likely qualify for the Section 199A deduction. Real estate professionals and lessors may also benefit from this new deduction. 

One caveat though... the new law disqualifies "specified service trades and businesses". These businesses include most of the traditional white collar professions (medicine, law, accounting, actuarial science, financial services and consulting). Paid athletes and performing artists are also deemed non-qualified. Taxpayers that operate in these service-based industries could have their deduction severely limited or eliminated altogether.

As with many provisions within the law, there are limitations as to whether an individual qualifies for the deduction and the amount. There are also many significant ambiguities in the language contained in Section 199A. Therefore, as with all taxes, proper planning is necessary to maximize the amount of deduction.

Please consult your tax professional at UHY Advisors in one of our many locations.