The Pass-Through Deduction and Tax Rate Drops – A Brief Discussion


Income tax rules are like life: interrelated and complex.  However, also like life, understanding a particular aspect of the tax rules sometimes requires focus on just a few key areas at once.

 Such is the case with the recently passed Tax Cuts & Jobs Act, largely effective January 1, 2018.  As has been written here and elsewhere, it has wide-ranging, often dramatic impact on personal and business tax considerations.

 A few of the many changes that deserve specific discussion as to their impact on businesses – or, more pointedly, business owners – are the cut in the corporate tax rate, the cut in the top individual tax rate, and the creation of the new pass-through deduction.

 A quick word (or three) about each of these changes:

1.       The top corporate income tax rate was (“is” through the end of 2017) 35%.  As of January 1, 2018, there is one corporate income tax rate of 21%.

2.       Individual income tax rates have been changed, and the top rate, which was (again, through 2017) 39.6% is now 37%.

3.       A new pass-through deduction of 20% of “qualified business income” has been created.  A few things to remember about this complex new provision are:


a.       It applies to U.S. business income passed through to owners of S corporations and partnerships, as well as to income from sole proprietorships.

b.       There are limitations based on the wages and property investment relating to the qualifying business.

c.       Not included as part of “qualified business income” is reasonable compensation paid to the taxpayer, guaranteed payments to a partner or member, or other payments to a partner or member outside his/her partner capacity for services rendered.

d.       Specified service trades or businesses (including but not limited to: law, medical services, accounting, etc.) are excluded from qualified trades or businesses (but see below regarding an exception).

e.       There are threshold amounts below which the wage limitation and service trade or business exclusion do not apply. 

For purposes of this brief, fairly nontechnical discussion, all of this adds up to significant potential tax savings for business owners, whatever their chosen structure.  A closer look at how the rate and deduction changes “shake out” is instructive in taking a fresh look at entity type options, and we’ll do that…next time, so don’t go far.


Michael A. Carraway, Jr., is a member with GranthamPoole PLLC and a recognized leader in the field of partnership and corporate taxation, having worked with many clients on entity and transaction structuring matters.  He has also written, taught, and spoken on many topics in the area over the years and has served as a technical subject matter expert in several practices.  Please contact Mike at,, or 601-499-2400. CPA License # R2705

The above does not represent tax advice.  Each situation is fact-dependent, and you should seek the advice of a competent advisor. GranthamPoole PLLC is a leading provider of tax, accounting, advisory and strategic services, partnering with clients across a broad spectrum of industries and sizes.

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