President Trump signed The Tax Cuts And Jobs Act (TCJA) into law on December 22, 2017. This new tax law includes a 20% deduction for Qualified Business Income (QBI). This deduction is referred to as a Section 199A Deduction in the Tax Code.

QBI includes the net income derived from a sole proprietorship (Schedule C income) or from a pass-through entity (an S Corporation or a Partnership). This deduction results in a maximum tax rate of 29.6% on this income.

QBI does not include income derived from a publicly traded partnership, REIT dividends or rental income.

The calculation of the 20% deduction is relatively simple for tax filers with QBI below $157,500 for Single filers and $315,000 for Married Filing Joint filers. The amount of the deduction is simply 20% of the tax filer's QBI. Whether a Qualified Trade Or Business (QTB) pays wages does not matter for the calculation. A Specified Service Business (SSB) also qualifies for the deduction.

The deduction may not exceed 20% of taxable income reduced by net capital gain.

The vast majority of small business tax filers have incomes below the above threshold amounts.

For tax filers with QBI above $207,500 for Single filers and above $415,000 for Married Filing Joint filers, the Section 199A Deduction is the lesser of

     1) 20% of QBI or
     2) the greater of
          a) 50% of the W2 wages with respect to the QBI or
          b) the sum of 25% of the W2 wages plus 2.5% of the unadjusted basis of all qualified property

A Section 199A Deduction is not allowed for a SSB with QBI above $207,500 for Single filers and $415,000 for Married Filing Joint filers.

For tax filers with QBI above $157,500 and below $207,500 for Single filers and above $315,000 and below $415,000 for Married Filing Joint filers, the Section 199A Deduction is a more complicated calculation and will not be covered here.

As a final note, there are many issues to be clarified by Congress with regard to the Section 199A Deduction. Once these issues are clarified, the IRS will provide additional guidance on the rules and regulations governing this deduction.