Internal Revenue Service creates 20% deduction for pass-through business

The Internal Revenue Service has issued proposals to regulate a new provision that allows owners of sole proprietorships, partnerships, trusts and S-corporations to deduct 20% of their qualified business income.

Keep in mind that this is not an automatic deduction, so eligible taxpayers should apply for the deduction in their 2018 federal income tax return, to be filed next year.

This deduction (Section 199A deduction or deduction for qualified business income) was one of the new guidelines created by the Tax Reform, approved in the US in December 2017. The deduction is available for tax years beginning after that date.

Check with your CPA if you’re eligible

Who is eligible

Taxpayers who declare jointly a taxable income up to USD 315,000.00 in 2018 may apply for the deduction. For those who file individually, the value is up to USD 157,000.00.

The 20% deduction applies to qualified business income plus 20% of qualified real estate investment trust dividends and qualified publicly traded partnership income or 20% of taxable income minus net capital gains.

Deductions for taxpayers above the USD 157,000.00 or USD 315,000.00 taxable income thresholds, however, will be limited, as described in the proposed regulation.

KEEP IN MIND that qualified business income refers to businesses and trades that generate income domestically (that is, in the United States). Employee ages, capital gains, interest and dividends are excluded from the proposed deduction.

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