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.

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.

QuickBooks Certified ProAdvisor - QuickBooks Online Certification

Jackson Metro:

1062 Highland Colony Parkway
Suite 201 Ridgeland, MS 39157
Phone: 601-499-2400
Fax: 601-499-2401


1200 Jefferson Avenue, Suite 206
Oxford, MS 38655
Phone: 662-234-8130
Fax: 662-234-8892



Alimony and the New Tax Act

The Tax Cuts and Jobs Act (the Act) ushered in significant tax reforms for both individuals and businesses with its passage last December. Most o.. Read More


Regulations Soon Issued for Carried Interest Limitations

The IRS announced it will be releasing regulations clarifying limitations around carried interests in S corporations in light of the new tax law. .. Read More


Interest on Home Equity Loans

The IRS recently advised taxpayers that in many cases, the interest paid on their home equity loans is still deductible under the new tax law. For.. Read More


529 Plans After Tax Reform – Better Than Before

Qualified tuition plans, also known as “529 plans” in reference to the applicable Internal Revenue Code Section, have been around for .. Read More


GranthamPoole PLLC Tax Reform Seminar

Listen in as our experts discuss some of the important changes in the tax code at our recent Tax Reform Seminar. The seminar covers changes such as in.. Read More


Effect of the Tax Cuts and Jobs Act on Valuations

The wide-reaching provisions of the Tax Cuts and Jobs Act (TCJA) will significantly affect values of businesses and assets. Small business owners.. Read More


Tax Reform Limits State and Local Tax Deduction

One of the areas affected by the Tax Cuts and Jobs Act (TCJA) is individual itemized deductions. This article will address one specific itemized .. Read More


Estate Planning Considerations as a Result of Tax Reform

The Tax Cuts and Jobs Act of 2017 (TCJA) reduces individual and corporate income tax rates, removes a multitude of credits and deductions, enhance.. Read More


Pass-Through Deduction and Tax Rate Drops in Action

We discussed recently a brief overview of the new tax rate changes for both corporations and individuals, as well as the new pass-through deductio.. Read More


How Tax Reform Affects Owners of Commercial Real Estate

Since the passage of the Tax Cuts & Jobs Act on December 22, we have seen a barrage of articles attempting to summarize and explain the effect.. Read More

View All News...

Want us to stay in touch?

* Required
Captcha Image

Copyright © 2014-2017 GranthamPoole PLLC
MS Firm Permit Number F0338