You should know that the deduction:
- Is only on U.S. sourced income.
- Will reduce taxable income on the federal tax return.
- Is only for the purpose of income tax, not self-employment tax. This means the deduction won’t reduce your self-employment taxes.
The deduction is limited to 20% of the lesser of:
- Net qualified business income; or
- Taxable income before the deduction and after reduction for any net capital gains.
Not every business will get the full 20% deduction, there are some limits once you hit a certain income level where you get less of a deduction, those are called phase-outs.
The phase-out ranges for “specified” service business and other business are the same:
- Married filing jointly: $315,000–$415,000
- All other filing statuses: $157,500–$207,500
The impact of the phase out is different depending on whether you’re a “specified” service business or other business.
Here’s how it may impact your return:
- Below the income thresholds - All types will get the full deduction.
- Inside the income thresholds - A portion will be reduced pro-rata.
- Above the income thresholds - Only “specified” service businesses get totally phased out. Other businesses may still qualify for some of the deduction.
Example:
Betty, Ian, Alice, and William all operate law practices as sole proprietors with different level of business income. They’re all single and none of them have any capital gains.
Betty Ian Alice William
(A) Net qualifying business income $100,000 $200,000 $100,000 $ 100,000
(B) Taxable income before new deduction $90,000 $220,000 $167,500 $120,000
Lesser of (A) or (B) $ 90,000 $200,000 $100,000 $100,000
New deduction before phase-out $18,000 $40,000 $20,000 $20,000
Phase-out $ 0 $40,000 $4,000 $0
New deduction allow $18,000 $0 $16,000 $20,000
