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One of the new additions to the tax code is the 199A deduction, or the 20% pass-through deduction. This deduction is of interest to small business owners, as many small businesses are organized as “pass-through” entities, meaning that the business’s profits and/or losses are taxed as part of the owner’s personal income.

If a taxpayer that owns a pass-thru has less than $315,000 of taxable income in a year (or half that amount for a single filer), the taxpayer will generally deduct 20% of their business income before they calculate how much federal income tax they owe. However, the new deduction is based on “qualified business income”, or income that you derive from a pass-through business minus any “net capital gains”, including stock.

An important aspect of the law that makes the deduction more widely available is that the income limits of $315,000 and $157,500 mentioned earlier are not based on adjusted gross income. Instead, they are based on taxable income (without regard to the pass-thru deduction).

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