Qualified Business Income and Section 199A
Qualified Business Income
Qualified Business Income (QBI) includes the net domestic business taxable income, gain, deduction, and loss with respect to any qualified trade or business. QBI specifically excludes the following items of income, gain, deduction, or loss:
1) Investment-type income such as dividends, investment interest income, short-term & long-term capital gains, commodities gains, foreign currency gains, and similar items.
2) Any Section 707(c) guaranteed payments paid in compensation for services performed by the partner to the partnership.
3) Section 707(a) payments for services rendered with respect to the trade or business.
4) Qualified REIT dividends, qualified cooperative dividends, or qualified PTP income.
Section 199A
With the enactment of the Tax Cuts and Jobs Act (TCJA), a new provision of the Internal Revenue Code was born: Sec. 199A, which permits owners of sole proprietorships, S corporations, or partnerships to deduct up to 20% of the income earned by the business. The motivation for the new deduction is clear: to allow these business owners to keep pace with the significant corporate tax cut also provided by the new tax law.
Effective for tax years beginning after Dec. 31, 2017, and before Jan. 1, 2026, a taxpayer other than a corporation is entitled to a deduction equal to 20% of the taxpayer's "qualified business income" earned in a "qualified trade or business." The deduction is limited, however, to the greater of:
50% of the W-2 wages with respect to the qualified trade or business; or
The sum of 25% of the W-2 wages with respect to the qualified trade or business, plus 2.5% of the unadjusted basis immediately after acquisition of all qualified property. The Sec. 199A deduction is available to any taxpayer "other than a corporation." This includes:
Individual owners of sole proprietorships, rental properties, S corporations, or partnerships; and
An S corporation, partnership, or trust that owns an interest in a pass-through entity.