Qualified owners of fiscal year flow-through entities such as LLCs, partnerships and S-corps may be eligible for two tax deductions on their 2018 income tax returns.
Prior to the Tax Cuts and Jobs Acts (TCJA) that was signed into law in December 2017, qualified owners were allowed to take a Domestic Production Activities Deduction (DPAD) of 9% of the flow-through income from qualified businesses. However, the TCJA repealed DPAD for tax years beginning after 2017, making the deduction not available for 2018 and going forward.
The TCJA then went on to essentially replace DPAD with another deduction based on qualified flow-through income called the Qualifed Business Income Deduction (QBID). The QBID is a maximum deduction of 20% of the flow-through income from qualified businesses. QBID was made available for 2018 through 2025.
Based on the TCJA, it appeared that QBID started when DPAD ended, basically replacing a 9% deduction with a 20% deduction. However, the IRS has indicated through proposed regulations and draft instructions that it will allow both DPAD and QBID for the same flow-through income for fiscal years ending starting in 2017 and ending in 2018.
So what does all of this mean?
It means that qualified owners can take both the 9% DPAD and the 20% QBID on their 2018 fiscal year flow-through income, a tremendous one-time double benefit of a 29% total possible deduction on that income. However, both the DPAD and the QBID have a number of limitations that are beyond the scope of this discussion. So if you are the owner of a fiscal year flow-through entity, please reach out to your Somerset contact to discuss the possible tax benefits.