Pass-Through Deductions

The pass-through deduction was introduced as part of the Tax Cuts and Jobs Act of 2017 and has since become a key tool for many small business owners to help them save on their taxes. Understanding how pass-through deductions work and who is eligible for them can be crucial for entrepreneurs looking to maximize their tax savings.

A pass-through deduction is a tax break that allows owners of certain pass-through businesses to deduct up to 20% of their business income on their personal income tax returns. Pass-through businesses are those where the income generated is passed through to the owner’s personal tax return rather than being taxed at the business level.

This deduction was introduced as part of the Tax Cuts and Jobs Act of 2017, and it applies to the following types of pass-through entities:

How to Calculate Pass-Through Deduction?

The calculation of the pass-through deduction can be quite complex, as it depends on a number of factors, such as the type of business, the amount of income, and the owner’s taxable income. Generally speaking, the deduction is equal to 20% of the qualified business income (QBI) generated by the pass-through entity. QBI is the net amount of income, gain, deduction, and loss generated by the business.

However, there are certain limitations and restrictions that apply to the deduction. For example, if the owner’s taxable income exceeds a certain threshold (currently $329,800 for married filing jointly and $164,900 for other taxpayers), the deduction may be reduced or phased out entirely.

Additionally, there are certain types of businesses that are excluded from the deduction, such as those in the fields of health, law, accounting, consulting, and financial services. To calculate the pass-through deduction, owners of pass-through entities must complete IRS Form 8995 or Form 8995-A.

Additional Details Pass-Through
Pass-Through Deductions 1

Additional Details:

  • Limitations and restrictions of the pass-through deduction:

As mentioned earlier, there are certain limitations and restrictions that apply to the pass-through deduction. In addition to the taxable income thresholds, there are limits on the amount of W-2 wages paid by the business and the amount of depreciable property owned by the business that can be considered when calculating the deduction.

  • Examples of Pass-Through Entities:

Sole proprietorships, partnerships, LLCs, and S corporations are all examples of pass-through entities. Each of these structures has unique tax benefits and drawbacks, and choosing the right one for your business will depend on various factors, such as the number of owners, the size of the business, and the level of liability protection needed.

  • Pass-Through Deduction for Real Estate Investors:

Real estate investors who own rental properties may also be eligible for the pass-through deduction, provided they meet certain criteria. To qualify, the rental activity must be considered a trade or business, and the owner must spend a certain amount of time managing the property or have hired someone to do so.


Who is eligible for the pass-through deduction?

Owners of certain pass-through entities, including sole proprietorships, partnerships, LLCs, and S corporations, may be eligible for the pass-through deduction.

What is qualified business income (QBI)?

QBI is the net amount of income, gain, deduction, and loss generated by a pass-through business.

Are there limitations on the pass-through deduction?

Yes, there are limitations and restrictions on the pass-through deduction, including taxable income thresholds, limits on W-2 wages and depreciable property, and exclusions for certain types of businesses.

How is the pass-through deduction calculated?

For tax years 2018 through 2025, the pass-through deduction is generally equal to 20% of the QBI from a qualified trade or business, subject to certain limitations and phaseouts based on the taxpayer’s income.

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