13 Oct 2019

Deep Dive on the Tax Cuts and Jobs Act QBI (Deduction Issues for Professionals )

Most attorneys, accountants, and other professionals operate as unincorporated sole practitioners, or through partnerships and limited liability partnerships (LLP), making them owners of pass-through entities. Such professionals may be able to cut the effective tax rate on the income from their practices through the use of the qualified business income (QBI) deduction [Internal Revenue Code (IRC) section 199A]. This deduction, which was created by the Tax Cuts and Jobs Act of 2017 (TCJA), is up to 20% of QBI, but limitations and other rules can limit or prevent any write-off. This article discusses some key issues related to the QBI deduction for professionals in light of recently proposed regulations (REG-107892-18, 8/8/18).

Overview

The QBI deduction is a personal deduction claimed on an individual’s federal income tax return as a reduction to adjusted gross income (AGI). The deduction does not reduce business income or gross income. Rules on the treatment of the QBI deduction for state income tax purposes depend on each state’s conformity with federal income tax rules and special state-level rules. It appears that in New York State and New York City, the QBI deduction is not allowed, because income taxes start with federal AGI, which does not include the QBI deduction. Future guidance from the New York Department of Taxation and Finance could, however, allow the deduction to be treated as an itemized amount for state and city income tax purposes.

The QBI deduction is 20% of qualified business income for a professional with taxable income up to $315,000 on a joint return or $157,500 on any other type of return. For example, a sole practitioner who is single and has taxable income of $125,000 can claim the full 20% of QBI deduction.

When a professional’s taxable income exceeds this threshold, then two limitations come into play: