A Significant Tax Break for Some Small Business Owners


Business owners should not automatically assume they can take the full pass-through deduction.

The new tax law introduced an income tax deduction for individuals, trusts and estates that own pass-through businesses. Pass-through businesses include sole proprietorships, partnerships, limited liability companies taxed as partnerships, and S-corporations.

The deduction equals 20% of qualified business income and is taken against the pass-through owner’s taxable income. For example, if Mary is a partner in a partnership and she is allocated $100 of the partnership’s net profits, her deduction is $20 (subject to limitations discussed below).

The 20% deduction means that the effective income tax rate for pass-through income could be 29.6% for a taxpayer in the top 37% income tax bracket.

The 20% pass-through deduction is not automatic.

There are limitations on a taxpayer’s ability to take the deduction

Chart: Limitations on ability to take deduction Chart: Limitations on ability to take deduction Chart: Limitations on ability to take deduction

In sum, the new tax law has created both opportunities and complexities for business owners. Business owners may want to consider possible restructuring options, strategic business property investments and their marriage filing status, to help maximize the new deduction. To explore these possibilities and more it is important that they speak with their advisor to best position their business under the new tax law.

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This information is not intended to be and should not be treated as legal advice, investment advice or tax advice and is for informational purposes only. Readers, including professionals, should under no circumstances rely upon this information as a substitute for their own research or for obtaining specific legal or tax advice from their own counsel. All information discussed herein is current only as of the date appearing in this material and is subject to change at any time without notice.