Pass-through Income Deduction

Non-corporate taxpayers may deduct up to 20 percent of domestic qualified business income from a partnership, S corporation, or sole proprietorship. (Code Sec. 199A deduction) A limitation based on wages paid, or on wages paid plus a capital element, is phased in for taxpayers with taxable income above a threshold amount. The deduction is not allowed for certain service trades or businesses, but this disallowance is phased in for lower income taxpayers.  The deduction applies to tax years from 2018 through 2025.


For individual taxpayers, the Code Sec. 199A deduction is not allowed in determining adjusted gross income. Further, it is not an itemized deduction, but it is available to individuals who itemize deductions and to those who claim the standard deduction. However, the deduction amount cannot be more than the taxpayer’s taxable income (reduced by net capital gain) for the tax year.


Business owners need to be aware of these deductions in determining not only 2018 tax return amounts but for calculating estimated payments and withholding for 2019.



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