The “Pass-Through” Deduction- Part II

March 6, 2018 - 4 minutes read


The Tax Cuts and Jobs Act is one of the most active topics for businesses and individuals right now (even though we are all completing tax filings for 2017 under the laws in place at that time). The new legislation contains a significant tax deduction that applies to qualified business income “(QBI”) of pass-through entities and sole proprietors – including partners in partnerships, members of LLCs taxed as partnerships, shareholders of S corporations, owners of single-member LLCs and sole proprietors not operating through any legal entity.

In Part I, we focused on the QBI issues related to “specified service businesses.”  In Part II we will address other aspects of the QBI deduction.

Limitation Based on Wages & Capital

The portion of the deduction attributable to 20% of the taxpayer’s QBI cannot exceed the greater of (1) 50% of their share of W-2 Wages paid with respect to the QBI or (2) the sum of 25% of their share of W-2 Wages plus 2.5% of the unadjusted basis of qualified property.  W-2 Wages do not include any such amount that is not allocable to QBI.

For example, a taxpayer (who is subject to the limit) does business as a sole proprietorship conducting a small specialty equipment manufacturing business. The business buys a machine for $200,000 and places it in service in 2018. The business has no employees.  Since the business has no W-2 wages, the QBI deduction is limited to 2.5% of the $200,000 of equipment.  Therefore, the amount of the limitation on the taxpayer’s QBI deduction is $5,000.

Phase-in of Wages and Wages & Capital Limitation

The wages or wages plus capital limitation does not apply to taxpayers with taxable income not exceeding $315,000 (joint filers) or $157,500 (other filers). The limitation is phased-in for taxpayers with taxable income exceeding these amounts over ranges of $100,000 and $50,000, respectively.

Definition of Qualified Property

The term qualified property is generally defined to mean tangible property of a character subject to depreciation.  Also note that the Conference Agreement defines the term “depreciable period” to mean the later of 10 years from the original placed in service date or the last day of last full year in the applicable recovery period determined under section 168.  This rule adds yet another layer of complexity to the QBI deduction computation.

Carryover of Losses

Section 199A provides rules regarding the treatment of losses generated in connection with a taxpayer’s qualified trades or businesses. Under these rules, a net overall loss from the taxpayer’s qualified trades or businesses will be carried forward to subsequent tax years.

Definition of Qualified Trade or Business

A qualified trade or business includes any trade or business other than a “specified service trade or business” or the trade or business of performing services as an employee.  See Part I for the specific rules relating to specified service businesses.


The American Institute of CPAs recently sent an urgent request to the Internal Revenue Service and the Treasury Department, asking for “immediate guidance” regarding various aspects of the new tax law including numerous aspects of the qualified business income deduction.

We, along with many other practitioners and taxpayers, hope this guidance will be issued soon.

Price CPAs regularly provides information and insight on topics of interest in this blog. Please contact us at 615-385-0686 or through our website ( to explore how our experience and services may be of value to you, your family or your company.

Mark Fly





Mark Fly, CPA/ABV Tax Director

Price CPAs, PLLC