As you may be aware, the Tax Cuts & Jobs Act was signed into law in December of 2017 and one of the key features of this new legislation is a 20% deduction for certain pass-through income. While this will benefit many taxpayers, there are several considerations to be aware of … some good, some not so good and some neutral.
The good news is that if you are a partner or S Corp shareholder, the QBI deduction (also known as a 199A deduction) does not reduce your tax basis. In other words, you get the benefit of the deduction, but unlike a distribution, your basis in the partnership or S Corp will not be reduced by the amount.
Some not as good news – the QBI deduction will not reduce self-employment tax, nor will it reduce the net investment income tax. The tax owed for these items will remain the same as the QBI deduction doesn’t apply. No change here, so not a huge negative – just keeping things as they are.
A few more things to be aware of:
The QBI deduction is the same for AMT as it is for regular tax. There is no specific add-back for the 20% deduction.
One last item: if a QBI deduction is claimed, the threshold for the understatement penalty has been reduced to the greater of 5% (instead of 10%) of the tax required to be shown on the return for the tax year or $5,000.
This is meant to be a broad overview of some of the issues related to the deduction so, as always, contact your Henry+Horne tax advisor for more information.
Ron Greenfield, CPA