The Tax Cuts and Jobs Act adds a new deduction for non-corporate taxpayers for qualified business income. The deduction reduces taxable income, and is generally 20% of a Taxpayer's qualified business income (QBI) from a Partnership, S-Corporation, or Sole Proprietorship, defined as the net amount of items of income, gain(s), deduction(s), and loss with respect to the trade or business. Certain types of investment-related items are excluded from QBI, e.g., capital gains or losses, dividends, and interest income (unless the interest is properly allocable to the business).

Taxpayers whose taxable income exceeds the threshold amount of $157,500 ($315,000 in the case of a joint return) are subject to limitations based on the W-2 wages and the unadjusted basis in acquired qualified property. For service related businesses, there is a separate phase-out if taxable income exceeds the threshold amount.
The deduction is taken for Partnerships and S-Corporations at the Partner or Shareholder level. Trusts and Estates are eligible for the deduction. W-2 wages and the unadjusted basis in acquired qualified property are apportioned between the trust or estate and the beneficiaries. Specified agricultural or horticultural cooperatives are also eligible for the deduction under special rules. Qualified Business Income includes only income effectively connected with a U.S. trade or business (or Puerto Rico if all the income is subject to US tax).
The deduction is intended to reduce the tax rate on qualified business income to a rate that is closer to the new Corporate tax rate.

Simplified Worksheet

Worksheet available in Form 1040 Instructions, page 37.  The worksheet shown summarizes the trade or business income, then runs the computation to determine how much will be able to be deducted from income.

Detailed Scenarios and Calculation Flowchart:

To view detailed scenarios including a calculation flowchart, see: Tax Reform - Qualified Business Income (QBI) Deduction


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