What’s this 20% tax deduction I keep hearing about?

Is the 20% on top of the IRS standard deduction? In other words, should qualifying business owners first deduct the standard deduction and then apply the 20%?

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  1. 6 Answers

    Yes, sole proprietor, partnerships and S-Corp owners can deduct up to 20% of net qualified business income deductions (QBI) from a pass-through business in the U.S. on their taxes plus 20% of qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income. S-corps and partnerships are generally not taxable and cannot take the deduction themselves. It is reported as part of the shareholder’s or partner’s share of QBI items, W-2 wages, UBIA of qualified property, qualified REIT dividends and PTP income on a Schedule K-1 or business statement so that the shareholders or partners may determine their portion of the overall deductions.
    NOTE: There are limitations in place that may prevent you from taking QBI. QBI serves as a personal write-off one can claim regardless of taking the standard deduction or itemized personal deductions. It does not reduce your adjusted gross income (AGI), or net business income nor reduce your net investment income. It is treated similarly to the allowable itemized deduction. Standard deductions come first on the IRS Form 1040 on line 9, then QBI on line 10.
    Calculation of QBI can be completed under the former section 199A(b)(7) (patron reduction) with use Form 8995 or Form 8995-A. Attach of these forms to your Form 1040.
    If your taxable income is between $315,000 and $415,000 or $157,500 and $207,500 (other), your deductions will be subject to additional limitations:
    – Personal share of 50% of W-2 wages paid to employees during tax year that is correctly allocated to QBI, or
    – The sum of personal share of 25% of W-2 wages plus share of 2.5% of unadjusted basis immediately after possession of (UBIA) of qualified property.
    . Also, you face restrictions if your business falls into any of the specific service trade or business (SSTB) categories in the following industries:
    – Health
    – Law
    – Accounting
    – Actuarial science
    – Performing arts
    – Consulting
    – Athletics
    – Investing & investment management
    – Trading
    – Dealing in securities, partnership interests, or commodities
    – Any business with a principal asset of reputation or skill or one or more of its employees or owners

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