One of the more interesting, but complicated, provisions of the 2017 Tax Act (also referred to as the 2017 Tax Cuts and Jobs Act) is the provision providing a partial deduction from “qualified business income” received by non-corporate taxpayers from pass-through entities. This new itemized deduction (i.e., this is not an “above-the-line” deduction) is generally up to 20% of qualified business income. The deduction, however, is subject to limitations based on the taxpayer’s taxable income in excess of net capital gains, and on the business entity’s W-2 wages paid to employees and investment in newly-acquired qualified tangible assets.
Taxpayers in most service businesses, such as accountants, lawyers, athletes, artists and healthcare professionals, are eligible for the deduction but are also subject to an additional limitation, a phase-out of the deduction if taxable income exceeds certain thresholds ($157,500 for a single taxpayer and $315,000 in the case of a joint return). The deduction may not be taken against W-2 wages or guaranteed payments received by the individual from the business.
The deduction is available for tax years beginning in 2018 and, like most of the provisions applicable to individuals (but not corporations), does not apply to tax years beginning after 2025.