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Thousands of businesses can now find out if they will be eligible for the 20 percent small business tax deduction included in the Tax Cuts and Jobs Act.

The U.S. Department of Treasury and the IRS issued proposed regulations this morning that “ensure that this historic tax cut will be available to the broadest spectrum of American businesses…”

The deduction is aimed at helping small businesses that pay income taxes instead of corporate taxes, companies such as partnerships, LLCs, S-corporations and sole proprietors.

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But not all small businesses are eligible, and not all income of small businesses is applicable. Who’s in and who’s out had been left to the administration to work out, leaving many small businesses wondering what their tax liability for this year will be.

The rules released today should clarify the status for most of them.

“The pass-through deduction is an important tax cut for small and mid-size businesses, reducing their effective tax rates to their lowest levels since the 1930s,” said Treasury Secretary Steven  Mnuchin.  “Pass-through businesses play a critical role in our economy.  This 20-percent deduction will lead to more investment in U.S. companies and higher wages for hardworking Americans.”

According to Treasury, the rule ensures that all small business income below $315,000 for married couples filing jointly and $157,500 for single filers is eligible for the deduction.

The rules also:

  • clarify what to do with pass-through income from multiple sources;
  • provide guidance on specified service, trade or business (SSTB) income above the thresholds, which may be subject to limitation for the purposes of claiming the deduction; and
  • allow a de minimis exception to avoid unnecessary compliance costs for businesses earning only a small percentage of SSTB income.

“This is the first broad brush deduction available only to businesses owners since the inception of the Federal income tax in 1913,” tax attorney Robert Schwartz told NJBIA back in March. Schwartz is part of the firm Lindabury, McCormick, Estabrook and Cooper, P.C. in Westfield.

Read the regulations here.