The Treasury has issued final regulations explaining who qualifies for the new tax law’s 20% “qualified business income” (QBI) deduction for pass-through entities (PTEs). This provision affects business cash flow, operations, and long-term strategy that will impact valuations of businesses that range from mom-and-pop convenience store owners to private equity investors. The final rules provide details on the type of service businesses that are excluded from claiming the deduction above a certain income threshold. Specific industries including healthcare, law, accounting, and consulting do not qualify. But others, such as the real estate industry, architects, and engineers, receive the benefit.

While the Tax Cuts and Jobs Act (TCJA) provided permanent tax relief to corporations, which saw their tax rate slashed from 35% to 21% and an end to U.S. taxes on much of their foreign profits, PTE owners got only temporary relief under the law’s individual tax provisions, which are due to expire after 2025. IRC Code Section 199a allows a 20% write-off of QBI for certain sole proprietors, owners of S corporations, and members of partnerships/LLCs.

Extra: Three other related pieces of guidance were also issued: proposed regulations on several aspects of the QBI deduction, including qualified REIT dividends received by regulated investment companies, a revenue procedure on determining W-2 wages for QBI deduction purposes, and a notice on a proposed revenue procedure providing a safe harbor for rental real estate.