Can you tell me more about this 20% tax deduction for pass through entities? Do I qualify?

The 20% tax deduction applies to self-employed people and owners of pass-throughs such as LLCs, partnerships and S corporations that pass their income to owners for tax purposes.

Many of these individuals can deduct 20% of qualified business income.  QBI is your allocable share of the income less deductions from the trade or business.  It doesn’t include capital gain, capital loss, dividends, nonbusiness interest income, reasonable compensation paid to you or guaranteed payments from partnerships.  If you’re involved in multiple businesses, you determine QBI of each one separately, and you first figure the deduction, subject to any limitations, on each business.

The deduction is “below the line.”  It won’t reduce self-employment earnings or adjusted gross income.  People needn’t itemize to take advantage of the write-off.

Two rules apply to people with higher taxable incomes – in excess of $315,000 for couples filing a joint return and $157,500 for all others.  It’s important to note that the definition of taxable income excludes the 20% deduction.

First – the break phases out for these high-incomers in certain service fields.  They include health, law, accounting, consulting, financial services, performing arts, actuarial science, athletics, brokerage services, investing or trading in securities, or any business where the principal asset is the reputation or skill of its employees.  If you’re in one of the affected fields and your taxable income exceeds $415,000 for joint returns..$207,500 for all others, the deduction is zero for that business.

Second – there is a W-2 wages-paid limitation for high-income individuals that applies even if the person isn’t engaged in a specified service business.  This caps the deduction at the basic 20% of QBI from the business or, if lower, a figure that looks at W-2 wages paid by the firm and the basis of certain assets.

There’s also a taxable income limitation that applies to all taxpayers.  The deduction can’t exceed 20% of overall taxable income, excluding the deduction, less any net capital gain.  If it does, the write-off is limited to 20% of taxable income.

via Kiplinger Tax Letter