Most attorneys, accountants, and other professionals operate as unincorporated sole practitioners, or through partnerships and limited liability partnerships (LLPs), making them owners of pass-through entities. Such professionals may be able to cut the effective tax rate on the income from their practices through the use of the qualified business income (QBI) deduction (Code §199A). This deduction, which was created by the Tax Cuts and Jobs Act of 2017, is up to 20 percent of QBI, but limitations and other rules can limit or prevent any write-off. Here are some key issues related to the QBI deduction for professionals in light of recently proposed regulations (REG-107892-18, released on Aug. 8, 2018 and published in the Federal Register on Aug. 16, 2018).

Overview

The deduction under Code §199A (QBI deduction) is a personal deduction claimed on an individual’s federal income tax return. It is neither a deduction in computing an individual’s adjusted gross income, nor is it an itemized deduction. The deduction does not reduce business income. Rules on the treatment of the QBI deduction for state income tax purposes depends on each state’s tax conformity with federal income tax rules and special state-level rules. It appears that in New York and New York City, the QBI deduction is not allowed because income taxes here starts with federal adjusted gross income (which does not include the QBI deduction). However, future guidance from the New York Department of Taxation and Finance could allow the deduction to be treated as an itemized amount for state and city income tax purposes.