TAX BULLETIN 2018-1: TAX REFORM SIGNED INTO LAW PASS-THROUGH ENTITY TAXES 2017 Law 2018 Law Subject to tax at individual rates up to 39.6% An individual taxpayer generally may deduct 20% of domestic qualified business income from a partnership, S corporation, or sole proprietorship? In the case of a taxpayer who has qualified business income from a partnership, S corporation or sole proprietorship, the amount of the deduction is limited to the ter of (i) 50% of the W-2 id b Top Rate: Pass-Through grea ere (i): orine 5, Ereee Eel — te . business or (ii) sum of 25% of W-2 wages paid Entities (S-corporations, . . . . by business and 2.5% of business capital. This LLCs, LLPs and eran . . wage limitation (i) does not apply if Partnerships) / Sole ; : : 3 . hi taxpayer’s taxable income is less than roprieterships $157,500 ($315,000 for joint return); (ii) applies fully if taxable income exceeds $207,500 ($415,000 for joint return); and (iii) applies proportionately if taxable income is between those two limits Trusts and estates that own business interests qualify for this deduction Deduction is a post-AGl item, even for taxpayers not itemizing deductions Subject to tax at individual rates up to 39.6% For “specified service business,” {i) the 20% deduction applies fully if taxpayer’s taxable income is less than $157,500 ($315,000 for joint return); (ii) there is no deduction if _ taxable income exceeds $207,500 Pass-Through Entities — ($415,000 for joint return); and (ii) there is Service Businesses a partial deduction if taxable income is between those two limits..* Service business includes accounting, law, consulting, investing, etc., but excludes engineering and architecture services OBSERVATIONS — PASS-THROUGH ENTITIES As originally proposed, the House and Senate took fundamentally different approaches to the taxation of pass- through entities (sole proprietorships, partnerships, LLCs, LLPs and S-corporations). While they differed from each other, they shared the goa