CHAPTER 21Qualified Business Income Deduction
When the Tax Cut and Jobs Act lowered the corporate tax rate to 21%, there was an attempt by Congress to reduce the tax rate for owners of pass-through entities in an indirect way. Instead of providing a special tax rate that these owners could apply to their business income, Congress instead created a special deduction that in effect lowers the tax rate (e.g., the top rate of 37% becomes an effective tax rate of 29.6% when the qualified business income deduction is applied), but only for some pass-through owners. The special deduction is called the “qualified business income (QBI) deduction.” This deduction does not require any special outlay or action; you claim it if you are eligible.
General Rules
The deduction may be claimed by owners of pass-through entities (subject to the limitations below). Pass-through entities include sole proprietorships (including independent contractors, freelancers, farmers, and other self-employed individuals), partnerships, limited liability companies, and S corporations. C corporations and their shareholders cannot claim the qualified business income deduction; they aren't a qualified business. Employees cannot take the deduction with respect to their wage income.
The deduction is not a business ...
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