The Tax Cuts and Jobs Act of 2017 contained a new provision allowing many owners of sole proprietorships, partnerships, trusts, and S-corporations to deduct 20% of their qualified business income. On Wednesday, August 8, 2018, the IRS announced they have issued the long-awaited, proposed regulations for the new deduction. Below is an excerpt from their news release:
The new deduction — referred to as the Section 199A deduction or the deduction for qualified business income — was created by the Tax Cuts and Jobs Act. The deduction is available for tax years beginning after Dec. 31, 2017. Eligible taxpayers can claim it for the first time on the 2018 federal income tax return they file next year.
The deduction is generally available to eligible taxpayers whose 2018 taxable incomes fall below $315,000 for joint returns and $157,500 for other taxpayers. It’s generally equal to the lesser of 20 percent of their qualified business income plus 20 percent of their qualified real estate investment trust dividends and qualified publicly traded partnership income or 20 percent of taxable income minus net capital gains.
Deductions for taxpayers above the $157,500/$315,000 taxable income thresholds may be limited. Those limitations are fully described in the proposed regulations. Qualified business income includes domestic income from a trade or business. Employee wages, capital gain, interest and dividend income are excluded. In addition, Notice 2018-64, also issued today, provides methods for calculating Form W-2 wages for purposes of the limitations on this deduction.
The dedicated team of professionals at Calvetti Ferguson have begun reviewing the proposed regulations and will publish a series of articles in the coming weeks to provide clarification on the many questions that have arisen since the deduction was first enacted into law in December 2017.