The President Trump pass-through deduction

On Dec. 27, 2017, Donald Trump, who was then president of the United States, signed a major federal tax bill called the Tax Cuts and Jobs Act of 2017. The principal purpose of the bill was to provide massive federal income tax cuts to large corporations.

However, the bill also contained a section — namely, Internal Revenue Code section 199A — that, beginning on Jan. 1, 2018, provided an enormous 20% annual federal income tax deduction to individuals who own interests in “pass-through businesses.” Pass-through businesses include state-law sole proprietorships, S corporations and entities taxable as partnerships. Some of these businesses are themselves worth billions of dollars.

Whatever you may think of Trump, you’ll have to admit that Section 199A brings enormous benefits to pass-through business owners. Without it, some of them would lose their business.

Furthermore, since tax time is now upon us, New Hampshire business owners must do some serious thinking about section 199A. This is because, although the section is likely to be of great importance to them, it’s quite possible that in their 2022 Form 1040, they should be making larger section 199A claims than they’re presently planning; and perhaps they haven’t been planning to make such a claim at all.

Here are the main things which New Hampshire business organizations should consider in thinking about section 199A:

— For most of them, the section 199A deduction will be 20% of their “qualified business income” (referred to by tax professionals as their “QBI"). An individual’s QBI is generally his or her net business income.

However, to maximize their QBI, business owners shouldn’t pay themselves compensation if they are sole proprietors or members of LLCs taxable as partnerships; and if their businesses are taxable as S corporations, they should pay themselves only the lowest permissible W-2 wages. This is because these payments must be deducted from their QBI, and this deduction will also reduce their section 199A deduction. Instead, they should pay themselves in the form of distributions of profits. And their shareholder agreements and LLC operating agreements should so provide.

— What if, during 2022, they are married and their joint taxable income exceeds $340,100, or they are single and their taxable income exceeds $170,050? In these situations — situations which, of course, don’t apply to most pass-through business owners — the greater the excess of their income over the above amounts, the less will be their section 199A deductions. And this will be even more so if, under section 199A, they own “specified service businesses” rather than “qualified businesses.” (Under Section 199A, specified service businesses include most types of professional businesses; qualified businesses include all other types of businesses.)

However, there are ways to restructure any type of pass-through business to reduce these harsh tax results. New Hampshire pass-through business owners should do this restructuring.

— By its terms, the section 199A deduction will be repealed at the end of 2025. So, for some New Hampshire business owners, the above tax restructuring might not seem worthwhile. However, Congress is free at any time to extend the term of section 199A indefinitely. And if it doesn’t, business owners qualified for the deduction will raise hell — especially if they own billion-dollar companies. Congress won’t want to irritate these billion-dollar guys.



John Cunningham is a lawyer licensed to practice law in New Hampshire and Massachusetts. He is of counsel to the law firm of McLane Middleton, P.A. Contact him at 856-7172 or His website is For access to all of his Law in the Marketplace columns, visit

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