Qualified Business Income Deduction – Section 199A

The Tax Cuts and Jobs Act (TCJA) signed into law in 2017 provided a major tax reform for the Section 199A deductions. Section 199A is a qualified business income (QBI) deduction. This deduction allows eligible domestic businesses to deduct up to 20% of their QBI, plus 20% of qualified real estate investment trust (REIT) dividends and publicly traded partnership (PTP) income. The deduction is limited to 20% of taxable income minus net capital gains. Income earned by a C corporation or by providing services as an employee isn’t eligible for the deduction.

QBI component

This component of the deduction is equal to 20 percent of QBI from a domestic business as a sole proprietorship or through a partnership, S corporation, trust, or estate. QBI is the net amount of qualified items of income, gain, deduction, and loss from any qualified trade or business, including income from partnerships, S corporations, sole proprietorships, and certain trusts. These items must be effectively connected with the conduct of a trade or business within the United States, and count only items in taxable income.

REIT/PTP component

This component of the deduction equals 20 percent of qualified REIT dividends and qualified PTP income. Distributions from REITs are usually a combination of return of capital, capital gain distribution, and ordinary dividends.

Computing the QBI Deduction

Form 1040 instructions and Publication 535 both provide worksheets to compute the deduction.

For more information about QBI or to see if your business qualifies for the QBI deduction, please contact the professionals at the Center for Financial, Legal, and Tax Planning, Inc., at (618) 997-3436.