Big new business deduction for qualified business owners

One of the highlights of the 2018 Tax Cuts and Job Acts is that now eligible taxpayers may now deduct up to 20% of certain business income. The entity types that may qualify are sole proprietors or through partnerships, S corporations, trusts, and estates. The deduction my also be claimed for certain dividends. This deduction can be claimed for the first time for the 2018 tax year.

There are some things that business owners should know about this deduction:

The deduction applies to qualified:

- Business income

- Real estate investment trust dividends

- Publicly traded partnership income

Are you wondering what is considered "business income" to qualify? Qualified business income is the net amount of qualified items of income, gain, deductions and loss connected to a qualified U.S. trade or business. Only items included in taxable income are counted.

This deduction is available for taxpayers that itemize their deductions on schedule A or take that standard deduction - either way you can claim it.

C- corps are not eligible for this deduction. If you provide service as an employee you are also ineligible.

In general, the deduction is equal to the lesser of two amount:

1) Twenty percent of qualified business income plus 20 percent of qualified real estate investment trust dividends and qualified publicly traded partnership income.

2) Twenty percent of taxable income computed before the qualified business income deduction minus net capital gains.

There are limitations base on total taxable income (before the deduction). Married couple filing jointly whose income exceeds $315,000 ($157,000 for all other taxpayers) may be subject to additional limitations. The limitations are based on the type of trade or business, the taxpayer's taxable income, the amount of W-2 wages paid by the qualified business, and the unadjusted basis immediately basis immediately after acquisition of qualified property held by the business.

This new deduction should carefully be calculated so that certain pass through entities can benefit depending on their specific facts and circumstances.