What Is the Deduction for Qualified PTP Income?

The deduction for qualified Publicly Traded Partnership (PTP) income, established by the Tax Cuts and Jobs Act of 2017, allows eligible taxpayers to deduct up to 20% of certain income from a PTP. This provision is found in Section 199A of the Internal Revenue Code. It is a component of the larger Qualified Business Income (QBI) deduction but is calculated under a distinct set of rules. The deduction is not automatic and is subject to specific definitions of qualifying income and several limitations.

Understanding Publicly Traded Partnerships

A Publicly Traded Partnership is a business entity structured as a partnership, but its ownership interests are traded on an established securities market. This structure provides the liquidity of a publicly-traded stock while retaining the tax characteristics of a partnership. Unlike corporations, PTPs are not subject to federal income tax themselves and instead function as pass-through entities.

The pass-through nature means the PTP’s financial results, including income, gains, deductions, and losses, are allocated directly to its partners. This allocation is communicated to partners annually on a Schedule K-1 (Form 1065), “Partner’s Share of Income, Deductions, Credits, etc.” This form separates different types of income, such as ordinary business income, interest income, and capital gains, and lists various deductions.

What Constitutes Qualified PTP Income

Qualified PTP income is the net amount of qualified items of income, gain, deduction, and loss from a PTP’s trade or business activities. This figure must be calculated separately from any other Qualified Business Income (QBI) a taxpayer might have from other businesses, like sole proprietorships or S corporations. The limitations and calculations for PTP income are applied on a partnership-by-partnership basis.

The primary component of qualified PTP income is the partner’s share of the PTP’s ordinary business income. The calculation starts with this ordinary income and then subtracts certain deductions attributable to the trade or business, such as the deductible portion of self-employment taxes or contributions to self-employed retirement plans.

Certain types of income passed through from the PTP are specifically excluded from this definition. These non-qualifying items include portfolio income, such as interest, dividends, and any capital gains or losses. Guaranteed payments made to a partner for services rendered to the partnership are also not considered qualified PTP income.

The partnership itself is responsible for determining which items meet the criteria under Section 199A. Investors will find this information in the supplemental details accompanying their K-1.

Calculating the Deduction for Qualified PTP Income

The calculation for the deduction begins with a straightforward formula: 20% of the net qualified PTP income. This amount, however, may be subject to limitations depending on the taxpayer’s overall taxable income and the nature of the PTP’s business.

One limitation relates to whether the PTP is engaged in a Specified Service Trade or Business (SSTB). SSTBs include fields such as health, law, accounting, consulting, and financial services. If a taxpayer’s taxable income before the QBI deduction is above certain annual income thresholds, the deduction for income from an SSTB is phased out and eventually eliminated as income increases.

The final overall Section 199A deduction, which includes both the PTP component and any other QBI, is subject to an overarching limitation. The total deduction cannot exceed 20% of the taxpayer’s taxable income minus their net capital gains.

Reporting PTP Income and Deductions on Your Tax Return

Taxpayers report PTP income and claim the deduction using information from the Schedule K-1 (Form 1065) issued by the partnership. The information required for the qualified PTP income deduction is found in Box 20 of the K-1, identified by Code Z. The supplemental statement accompanying the K-1 will provide the net amount of qualified PTP income.

Taxpayers with taxable income below the statutory thresholds that trigger certain deduction limitations will use Form 8995, “Qualified Business Income Deduction Simplified Computation.”

Taxpayers with taxable income above the thresholds must use the more detailed Form 8995-A, “Qualified Business Income Deduction.” This form guides the taxpayer through applying the SSTB limitation, if necessary, to determine the final deduction for each partnership.

A distinct rule applies to the treatment of losses from a PTP. If a PTP generates a net loss for the year, that loss is suspended and cannot be used to offset other income on the tax return, including income from other PTPs. Instead, the loss is carried forward and can only be used to offset future net income from that same PTP.