Reference: Tax Cuts and Jobs Act of 2017

Example situation I: Married, total W2 $100,000. K-1 from a service-type S corporation shows net income $200,000 (the S corporation paid total wages to employees (including shareholder) of $100,000. The taxable income using 2018 federal regulations is $315,000.  Outcome: The pass-through deduction is $40,000.  If their effective rate is 20%, this has saved them $8,000 in federal tax.

Example situation II: Same as Situation I except household taxable income is $375,000.  Outcome: The pass-through deduction is $16,000. If their effective rate is 23%, this has saved them $3,680 in federal tax.   This is limited because the S corporation is a service-type business and their taxable household income exceeds $315,000.

Example situation III: Same as Situation II except the S-corporation is in retail sales (not a service-type business).  Outcome: The service business limitations don’t apply so the pass-through deduction is $40,000.