Eligible taxpayers may now deduct up to 20 percent of certain business income from domestic businesses operated as sole proprietorships, or through partnerships, S corporations, trusts, and estates. The deduction may also be claimed on certain dividends. Eligible taxpayers can claim the deduction for the first time on the 2018 federal income tax return they file in 2019. This provision is the result of tax reform legislation passed in December 2017.
What Business Owners Should Know About This Deduction
Types of Income That Qualify
The deduction applies to qualified:
- Business income
- Real estate investment trust (REIT) dividends
- Publicly traded partnership (PTP) income
Definition of Qualified Business Income
Qualified business income is the net amount of qualified items of income, gain, deduction, and loss connected to a qualified U.S. trade or business. Only items included in taxable income are counted.
Availability of the Deduction
The deduction is available to eligible taxpayers, whether they:
- Itemize deductions on Schedule A
- Take the standard deduction
How the Deduction is Calculated
The deduction is generally equal to the lesser of these two amounts:
- Twenty percent of qualified business income plus 20 percent of qualified real estate investment trust dividends and qualified publicly traded partnership income.
- Twenty percent of taxable income computed before the qualified business income deduction minus net capital gains.
Income Thresholds and Limitations
For taxpayers with taxable income before the qualified business income deduction that exceeds:
- $315,000 for a married couple filing jointly
- $157,500 for all other taxpayers
The deduction may be subject to additional limitations or exceptions. These limitations depend on:
- The type of trade or business
- The taxpayer’s taxable income
- The amount of W-2 wages paid by the qualified trade or business
- The unadjusted basis immediately after acquisition (UBIA) of qualified property held by the trade or business
Exclusions
Income earned through a C corporation or by providing services as an employee is not eligible for the deduction.
Frequently Asked Questions
Who qualifies for the 20% business income deduction?
Eligible taxpayers include individuals with domestic businesses operated as sole proprietorships, partnerships, S corporations, trusts, and estates. The deduction can also apply to those receiving certain REIT dividends and publicly traded partnership income, as long as the income qualifies.
Does the 20% deduction apply if I take the standard deduction?
Yes, the deduction is available whether you itemize deductions on Schedule A or take the standard deduction. It is separate from your standard or itemized deductions.
What income does not qualify for this deduction?
Income earned through a C corporation or as an employee providing services does not qualify. Only business income from qualified trades or businesses is eligible.
How is the deduction calculated?
The deduction is generally the lesser of 20% of your qualified business income (plus certain dividends and PTP income), or 20% of your taxable income before the deduction, minus net capital gains.
Are there income limits that affect eligibility?
Yes. For 2024, if your taxable income exceeds $315,000 for joint filers or $157,500 for others, additional limitations apply. These may include factors such as W-2 wages paid and the value of business property.