David Erard

David Erard

This article will focus on the Internal Revenue Code (“IRC”) §199A, which provides a new deduction of up to 20% of a taxpayer’s Combined Qualified Business Income Amount (“CQBIA”) starting in 2018. A full description of §199A provisions is beyond the scope of this article, which will provide a high-level overview of the deduction and some preliminary thoughts. Taxpayers stand to save up to 7.4% on their Federal taxes related to CQBIA, and this significant benefit is deservedly getting a lot of attention.


In the text of the TCJA, the §199A provisions were added under Part II – Deduction for Qualified Business Income of Pass-Thru Entities, and many in the tax community had expected that this new deduction would only apply to trade or business income allocated to an individual from a partnership or S-Corporation. However, the text of §199A itself does not limit the deduction to amounts allocated from pass-thru entities, apparently expanding the population of taxpayers who stand to benefit.

At a high level, QBI consists of the net ordinary rate income a taxpayer receives during a year from a qualified trade or business (“QTB”). The new deduction can be up to 20% of a taxpayer’s CQBIA, which consists of the following items:

1) QBI allocated to taxpayers from passthrough entities.

2) QBI reported directly on “Schedule C” of form 1040 (single-member LLCs and sole proprietorships).

3) Qualified REIT dividends.

4) Qualified PTP income.

The calculation of CQBIA will not be as simple as combining the net taxable income from the above sources; certain limitations need to be applied separately to each source of QBI, presenting its own set of challenges.


QTB is defined broadly as any trade or business other than (1) a specified service trade or business (“STB”), or (2) being an employee. STBs are defined largely by reference to IRC §1202 provisions (with certain modifications), as well as investing and investment management, and trading or dealing in securities, partnership interests, or commodities.

It remains unclear at this point when a given activity will rise to the level of being a QTB. Would an actively managed rental real estate property be viewed differently than a triple-net lease? Given that REIT dividends qualify for the 20% QBI deduction, and that REITs are intended to be passive in nature, there does not appear to be a reason rents within a REIT would be treated differently than those from a property in a partnership.


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