Tax law changes under the TCJA changed the top corporate tax rate from 35% to 21% beginning in the tax year 2018. The new reduced tax rate applies only to business entities that fall into the Subchapter C category, also known as corporations (or C-corporations). The TCJA addition of §199A was designed to provide tax relief to businesses that do not fall under the Subchapter C definition. Business entities that are considered “pass-through” entities (partnerships, S corporations, sole proprietorships, some trusts, and estates) do not benefit from the reduced top corporate tax rate of 21%. Pass-through entity income is passed through from the business entity to the business owner’s individual income tax return. The income is then taxed at the business owner’s individual tax rate which can be as high 37%. The QBI deduction is an attempt to create a balance and ease the tax burden for pass-through business owners who will not benefit from the reduced top corporate tax rate. The QBI deduction is applied at the individual taxpayer level, thus effectively reducing the individual top tax rate from 37% to 29.6%.
On August 8, 2018, the IRS released proposed regulations for the new §199A provision. The final regulations were issued on January 18, 2019, with three related pieces of guidance. The final regulations apply to tax years ending after the final §199A regulations are published in the Federal Register. Currently, the final regulations have been posted on the IRS website; however, they have not been published in the Federal Register.
There are several sections included in the proposed regulations. The following discussion will cover these topics in a general manner. More in-depth research is necessary to understand the QBI deduction fully.