Understanding the qualified business income deduction

The Tax Cuts and Jobs Act of 2017 (TCJA) is likely the most significant tax legislation since 1986.1 While the legislation is comprehensive, one of its major features is corporate tax rate reduction. In order for unincorporated businesses to remain competitive, the TCJA allows certain unincorporated businesses to claim the qualified business income deduction. Virtually every unincorporated business will have to consider the implications of this deduction. The underlying rules governing the applicability and computation of the deduction are extensive and require a thorough understanding in order to be properly implemented by taxpayers and practitioners. Although the Department of the Treasury and the Internal Revenue Service have provided extensive guidance, many uncertainties remain. The deduction applies to tax years 2018 through 2025, but it is unsure whether it will become permanent. This article discusses the rationale for enacting these provisions, explains the provisions in detail, and concludes that implementation will be an ordeal for tax practitioners and the government.