7782 / How are S corporation shareholders taxed under the 2017 Tax Act?
The 2017 tax reform legislation made substantial changes to the treatment of passthrough business income, which was previously simply “passed through” and taxed at the business owners’ individual ordinary income tax rates as discussed in Q 8967. Partnerships (and entities that elect partnership taxation, such as certain LLCs), S corporations and sole proprietorships are subject to the new passthrough taxation rules, which will apply for tax years beginning after December 31, 2017 and before December 31, 2025.1
S corporation shareholders may now generally deduct 20 percent of “qualified business income”2 (which largely excludes “specified service business” income (see below)).
S corporations that are categorized as service businesses and have income below the applicable
threshold level plus $50,000 ($100,000 for joint returns) also qualify for the 20 percent deduction.