In general, the Tax Cuts and Jobs Act bill allows pass-through owners making less than $157,500 ($315,000 for married couples) to take a flat 20 percent deduction on certain business income, before computing the ordinary income tax they would owe on the remainder. Under complex rules, the deduction phases out when taxpayers make over that amount but under $207,500 ($415,000 for married couples).

Then things change.

The Tax Cuts and Jobs Act introduces a new limitation on those non-services flow-through businesses whose taxable income exceed these threshold amounts in order to actually get the 20 percent deduction. This limitation requires that the 20 percent deduction also be less than the greater of two calculations both based wholly or partially on the W-2 salary expenses of the company. The first calculation requires that the company compute 50 percent of its paid wages. The problem: some commercial real estate owners making above those threshold levels may have relatively few employees on salary or pay low wages to those they do. So the bill offers a second way: use only 25 percent of the salaries paid, plus 2.5 percent of the purchase price, or “unadjusted basis,” of the company’s depreciable property. If either of those results is equal to or greater than the flat 20 percent deduction of business income, then a pass-through gets the 20 percent deduction. If not, then the deduction is limited to the greater of these two calculations.

The bill benefits entities that do not pay significant salaries to employees but do in fact make significant capital investment in depreciable property like buildings and equipment. But for this provision, these flow through businesses would  receive a much lower deduction than that permitted to flow-through businesses paying substantial salaries. This last minute change will be particularly beneficial to commercial real estate owners who frequently utilize flow-through vehicles and have few employees but significant leveraged capital investments.