Final IRS regulations on the qualified business income deduction are out. How will they affect your 2018 taxes?

The Tax Cuts and Jobs Act (TCJA) includes a generous deduction for smaller businesses that operate as pass-through entities, with income that is “passed through” to owners and taxed as individual income.

The IRS has released final regulations and additional guidance for the qualified business income (QBI), or Section 199A deduction. Among other things, the guidance provides clarity on who qualifies for the QBI deduction and how to calculate the deduction amount.

As always, you should consult your tax advisor if QBI applies to you.

QBI deduction in action

The QBI deduction generally allows partnerships, limited liability companies, S corporations and sole proprietorships to deduct up to 20% of QBI received. QBI is the net amount of income, gains, deductions and losses (excluding reasonable compensation, certain investment items and payments to partners) for services rendered. The calculation is performed for each qualified business and aggregated. (If the net amount is below zero, it’s treated as a loss for the following year, reducing that year’s QBI deduction.)

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Be sure to contact your tax advisor for how these rules apply to your situation.

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