New Tax Law Brings 20 Percent Pass-Through Income Deduction to MH World

Everyone is aware Congress passed a major tax bill right at the end of 2017.  The Tax Cuts and Jobs Act of 2017 makes significant changes to the Internal Revenue Code (IRC).  The broad highpoints range from changing individual rates, to increasing the standard deduction, to lowering corporate rates and creating a 20 percent deduction for pass-through income. 

Of course, on a personal level this is exhilarating for me.   A new nerd challenge that combines policy, politics, law, accounting, and some good old-fashioned Excel work. 

What can I say; for me it was a Christmas present.

For this piece, we are just going to focus on one area of the new law – the 20 percent deduction on pass-through income.

For us in the MH industry this area seemed particularly relevant with most of the independent retailers, MH community operators, and owner-finance lending businesses structured as some form of an income pass-through entity (sole-proprietors, partnership, LLC, or S-corps).

Quick Disclosure, Cliff’s Notes, and a Warning:

First, this article, like all our articles, is not legal or accounting advice.  TMHA cannot represent any member for any of their individual tax or accounting needs. 

As always, we strongly encourage all our members to consult with their own attorneys and accountants. 

Second, at the end of this article I include a Gross Oversimplification Quasi-Summary of the new law as it pertains to the majority of persons in the MH industry. If you are short on time, or, let’s be honest not exactly all that charged up to read about tax law, you can scroll to the bottom and see the summary. 

Just be careful relying too heavily on the Cliff’s Notes version.  It is only there to serve the highpoints.  Said more bluntly, if that is all you read and then you don’t consult with your own accountant and find yourself in an IRS audit, there is a good chance for your individual business you made some costly mistakes and showing my summary to your not-so-friendly auditor will not save you. 

The Basics and Policy Reasoning:

Businesses want the personal liability protection offered by a traditional corporation (C-Corp), but don’t like the fact that the company’s income is taxed at the corporate rate (albeit down to 21 percent now from the previous 35 percent), and then again individually with corporate dividends.  Pass-through entities are not taxed at the entity level, but rather the income passes through the entity and lands with the individual where only the individual income tax rates are applied. 

Under the previous tax law, assuming the highest tax rates apply, the difference in a C-Corp and a pass-through is a tax rate about 10 percent lower for a pass-through.  But when the new law dropped the C-Corp rate to 21%, if nothing was done for pass-through income the tax advantage would shrink from about 10 percent to 2.8 percent.  Thus, the policy reason for why something had to be done on the pass-through side of things to preserve the 10 percent advantage.

Enter Section 199A.  This is the section of the new law that allows for the 20 percent deduction of pass-through income.  I’d be happy to show the math of this, see I told you there was Excel fun involved, or you can take my word for it that by lowering the C-Corp tax rate, and then also lowering individual rates and including a 20 percent off the top deduction for pass-through income, the historical 10 percent tax advantage is preserved for pass-through income over corporate income and dividends.

Who Gets It?

First, everyone who is not a C-Corp is eligible with some limits on certain types of service businesses. But if you are not a C-Corp, and you are a “trade or business” as defined in the new law, then you get the new deduction.

In the MH retailer, MH community owner, and MH lender industries structured as pass-throughs - sole proprietor, partnership, S-Corp, or LLC - these will nearly always be eligible for the deduction. 

There are some potential exceptions for businesses with very little active management or operations, but for the most part our industries are going to be eligible because they are the right type of “trade or business” defined under the new law.  

Who Doesn’t Get It?

C-Corps and “specified service trade or businesses.”

The new deduction does not apply to “specified service trade or businesses.” If you or your spouse is involved in other businesses in the fields of: health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, investing services, investment management, trading, dealing in securities, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees, then, based on specific income levels, those business may or may not be eligible for this new deduction.

What is QBI?

The pass-through deduction applies to “qualified business income” or QBI.  Section 199A(c) defines QBI as:

the term ‘qualified business income’ means, for any taxable year, the net amount of qualified items of income, gain, deduction, and loss with respect to any qualified trade or business of the taxpayer. Such term shall not include any qualified REIT dividends, qualified cooperative dividends, or qualified publicly traded partnership income.

See, isn’t this great?  Within the definition is the phrase “qualified items of income, gain, deduction and loss,” which is then later defined itself.  Definitions within definitions, citations to embedded citations, ahhh, wouldn’t be federal tax law without them.

Qualified business income is essentially your ordinary business incomes less your ordinary business expenses.  Best to think of this as the normal income, less normal expenses, from operating your business. 

If you are also paid from the business that you get pass-through income from as an employee, the employee wages you earn are not counted towards the business’ QBI. 

Also, remember this is normal income and expenses, so investment types of income for the business from dividends and interest are not included. Specifically, the law lists as not included in QBI investment income for the business in the form of: short-term capital gain or loss; long-term capital gain or loss; dividend income; or interest income. 

QBI = Ordinary business income – ordinary business expenses – business investment income – W-2 wages paid to the tax payer

For example: Alexa is in the MH community rental business and reports the rental income on her Schedule E of her 1040 tax return of $100,000.  The MH community ordinary expenses are $40,000. Alexa has $2,500 in investment income from the business of running the community.  The MH community business also pays a W-2 salary from the MH community business of $25,000/year to Alexa.  What is the MH Community business’ QBI?

$100,000 - $40,000 - $2,500 - $25,000 = QBI of $32,500

Deduction Time

Now we know what type of income that it applies to, it’s time for the fun part – taking that 20 percent deduction.  Surely, it is simply multiplying your QBI by .20 to get your deduction, right? 

Not exactly. And stop calling me Surely.

We must back up a bit before we get to QBI and more fun with Excel.

The new law says the deduction is an amount equal to the sum of:

  1. the lesser of—
    1. the “combined qualified business income” amount of the taxpayer, or
    2. an amount equal to 20 percent of the excess (if any) of—
      1. the taxable income of the taxpayer for the taxable year, over
      2. the sum of any net capital gain (as defined in section 1(h)), plus the aggregate amount of the qualified cooperative dividends, of the taxpayer for the taxable year, plus
  2. the lesser of—
    1. 20 percent of the aggregate amount of the qualified cooperative dividends of the taxpayer for the taxable year, or
    2. taxable income (reduced by the net capital gain (as so defined)) of the taxpayer for the taxable year.

Some of this we will save for another day, otherwise this will get too unwieldy. Therefore subpart (2) on cooperative dividends I’m skipping, also because probably most have zero in the form of cooperative dividends, which means subpart (2) for most is zero (20% * 0 = 0, which will be less than even $1 of taxable income).

Quick recap before moving on.  What’s going on here?

While far from daily conversational speech, what this section says we must do to determine the deduction is compare “combined qualified business income” to 20 percent of a taxpayer’s taxable income (less capital gains).  When we do this comparison whichever one is less is the amount that we use for the deduction.  

Calculating Combined Qualified Business Income:

And now is where things get fun.  To determine “combined qualified business income” this deduction amount is the sum of two provisions and those two provisions have two options of which the lesser amount of both is what is added together. 

Let me guess, you are thinking “Huh?”

Let’s focus on the key provision of “combined qualified business income.”  Combined qualified business income is the sum of the deductions calculated for each trade or business based on its QBI plus 20 percent for REIT dividends and qualified publicly traded partnership income.

The new law says in 199A(b)(2) that the deduction amount is the sum of the:

  1. lesser of—
    1. 20 percent of the taxpayer’s qualified business income with respect to the qualified trade or business, or
    2. the greater of—
      1. 50 percent of the W–2 wages with respect to the qualified trade or business, or
      2. the sum of 25 percent of the W–2 wages with respect to the qualified trade or business, plus 2.5 percent of the unadjusted basis immediately after acquisition of all qualified property.
  2. Then add to (1) above: 20% of qualified REIT dividends and qualified publicly traded partnership income

The additional provisions in (2) that you add to (1), are straight forward.  You add in 20 percent of qualified REIT dividends, which does apply to some of the community investors who have invested in REITs, and qualified publicly traded partnership income, which if you don’t know what that means it is probably because you don’t get any publicly traded partnership income and you shouldn’t worry about it. 

Let’s focus on (1), but first, we have to introduce the Income Threshold Savings Clause Magic:

Before we get into the distinctions between (A) and (B) and all this W-2 wages and acquisitions of qualified property we run into what I call the, “Income Threshold Savings Clause magic.” 

The law lays out a magical threshold of $315,000 if married filing jointly ($157,500 other tax payers) in taxable income.  Alright, it isn’t actually magical, but in terms of tax policy it’s pretty close. The punchline is a taxable income level of $315,000 is a defined income threshold – at and below it, life is much simpler; above it and life gets more complicated.  The policy behind the “magic” is easy to understand; it is a direct benefit for small to medium size businesses.

The benefit of the threshold when calculating combined QBI is that the law says for those at and below $315,000 all you need to worry about is subpart (A), which is the simpler 20 percent multiplied by QBI.  The “lesser of” possible limitations on the deduction related to W-2 wages do not apply if you are at or below $315,000.  See there, magic.  

There is a phase-in range between $315,000 and $415,000, where a taxpayer is not subject to the full W-2 limits, but those limits are phased-in as income increases.  Once a taxpayer exceeds $415,000 the W-2 limitations become fully effective.  Addressing the details and math of the phase-in is beyond the scope of this article.

Ok, I’m going to pause again.  Before we go further on the W-2 wages and qualified property, let’s do an example of a smaller business where the W-2 and qualified property stuff doesn’t come into play.  A taxpayer who gets the magical Income Threshold Savings Clause.

Example: Taxpayer Alexa files a married filing jointly return.  Alexa is the only owner of an eligible trade or business, say Alexa owns and operates an MH community renting homes and lots, that generates $175,000 in combined QBI. Alexa’s taxable income is $125,000 (less than the $315,000 magical threshold) with $10,000 in capital gains.  What is Alexa’s deduction?

Trade or Business QBI Calculation: $175,000*.20 = $35,000

Taxable Income: $125,000 - $10,000 = $115,000*.20 = $23,000

$35,000 > $23,000

Alexa’s deduction is $23,000 

What if your taxable income is above $415,000? 

Alright, if you are bigger and have taxable income above $415,000, then you do have to concern yourself with subpart (B).  For you, the deduction is the “lesser” of two options, and one option has two components. 

Subsection (A) is easy now that we know what constitutes QBI and which businesses are eligible (and simple for all those at or below $315,000 since only (A) applies to them). 

Subsection (B) is new, and if the amount calculated under (B) is less than QBI multiplied by 20 percent, then you must use the lesser (B) amount. 

Subpart (B) is established this time by the larger of two options: (i) based on W-2 wages and (ii) based on W-2 wages and qualified property.  Crunch the numbers between the two, take the bigger one, and then compare that to QBI multiplied by 20 percent.  

W-2 Limitations

Subsection (B)(i) provides for W-2 limitations on the deduction amount.  You might be asking why on Earth they threw in subsection (B), which greatly complicates the entire process and clutters up our Excel sheet? 

The quick answer is to prevent a loophole that would have allowed for quite a bit of gaming the new system.  Without a throttling-down of the deduction based on W-2 limitations, a tax payer who was a wage employee could quit his or her job, set up their own LLC, then contract with their former employer and now take a 20 percent haircut off the top of their taxable income.

So, Congress threw in there these W-2 limits to prevent this from happening.  The way the W-2 limit prevents this abuse is by saying that if a pass-through entity pays no W-2 wages, presumably because there is only one person who owns the entity and rather than paying any wages all income flows through to the single owner, then that taxpayer cannot deduct anything under the new law because 50 percent multiplied by $0 in W-2 wages = $0.  Zero is less than whatever the QBI multiplied by 20 percent is, so you have to use zero.  Nice try, but you Do Not Pass Go, and you do not collect your 20 percent deduction.

To know what number to multiply by 50 percent we must know what exactly are “W-2 wages.”  Think of this as the amount of wages that a business would pay the business’ portion of Social Security Tax on. 

To take the more complicated route, technically the law says that W-2 wages mean,

“amounts described in paragraphs (3) and (8) of section 6051(a) paid by such person with respect to employment of employees by such person during the calendar year ending during such taxable year”

Super clear once again, since we all have in our heads as walking-around knowledge what paragraphs (3) and (8) of section 6051(a) of the IRC says.  No?  Ok, well for those that might not have this readily available in your prefrontal cortex, here are paragraphs (3) and (8):

(3) the total amount of wages as defined in section 3401(a)

(8) the total amount of elective deferrals (within the meaning of section 402(g)(3)) and compensation deferred under section 457, including the amount of designated Roth contributions (as defined in section 402A)

Well, that certainly cleared it up, didn’t it?  You are pulling your hair out right now, aren’t you? 

Don’t fret. 

Wages are all remuneration paid to an employee for their services, including the cash value of benefits paid.  Granted, under 3401(a) there are then 23 (not kidding) specific exclusions as to what are not considered wages, but I’m not going to go into those (only to say, yes, if you are curious in the IRC it says that if you are under 18 years old, and you get paid for delivering newspapers those are not taxable wages).

So “W-2 wages” are, well, wages paid, including 401(k) benefits. 

But per section 199A(b)(4)(C) wages do not include (other than a teenager’s paper route) anything paid that doesn’t hit the business’ Social Security payroll obligation.  This means costs like contractor fees and vendor fees do not count towards your W-2 wages.  For an MH community owner if you have outsourced the administration of your water submetering or pay property management fees, these are also not considered W-2 wages.  Those fees and amounts you pay to vendors and service providers that get a 1099, and don’t hit your payroll are not W-2 wages. 

Unadjusted Basis of Qualified Property:

The other subpart that you compare to the 50 percent of W-2 wages to, is 25 percent of W-2 wages plus 2.5 percent of the unadjusted basis immediately after acquisition of all qualified property. 

Terrific, wait, what in the world is “unadjusted basis immediately after acquisition of all qualified property?”

Enter Section 199A(B)(6)(A), which says essentially that “qualified property” is tangible (you can touch it) property that is depreciable under Section 167; held by and available for use by the close of the tax year; used, at any point, in the tax year to produce QBI; and who’s depreciation period did not end before the close of the tax year. 

Inventory for retailers and community operators are not depreciable under Section 167, and therefore, are not included as “qualified property.” Also land and loan costs fail to be “qualified property” because land is not depreciable, and loan costs are not tangible.

But other land improvements, like an MH you rent in your rental community, and the personal property used in the business, like equipment that you depreciate, are all “qualified property.”

The “depreciation period,” which remember can’t end before the end of the tax year to be included, is defined in Section 199A(B)(6)(B) as:

The period beginning on the date the property was first placed in service by the taxpayer and ending on the later of—

  1. the date that is 10 years after such date, or
  2. the last day of the last full year in the applicable recovery period that would apply to the property under section 168 (determined without regard to subsection (g) thereof, which is the Alternative Depreciation System).

The date the depreciation period ends is critically important because remember if the date ends before the year, then you don’t include that property in your calculation. 

The new law creates a minimum of 10 years for any depreciable property.  Meaning if you buy property that has a depreciation schedule less than 10 years, you still get to count it for 199A purposes for 10 years. But if you buy property, like an MH that you are going to put in your community and rent the home, then the IRC says your depreciation schedule is 27.5 years, so under 199A for the pass-through deduction you use 27.5 years.

Last point to reiterate, the new law under subpart (ii) requires that you use the “unadjusted basis immediately after acquisition” of property. This is good news.  This means what you paid to originally buy the property. 

So, if you bought depreciable property, like an MH for your community that you are going to use as a rental, for $40,000 but over the years you have depreciated the MH down so that the current basis is $5,000, when you go to calculate (ii), assuming the property is still within its deprecation period, you use the original $40,000 to multiply by 2.5 percent.

W-2 and Acquired Qualified Property Example:

Bill has a job and owns an MH community business.  Bill’s total taxable income from Bill’s day job, spouse’s income, and Bill’s rental MH community business is $475,000.

So, Bill has taxable income over $415,000, which means the full W-2 limits will apply. 

Bill’s MH community business generates $100,000 in QBI. 

Bill’s MH community business has an on-site manager whose total compensation for salary, sales commission and onsite living accommodations comes to $38,000. 

Bill’s MH community business for the current tax year has tangible, in use, depreciable property used to produce QBI that is still within its depreciable period for the current year, including five MHs originally purchased for $30,000 each, of $165,000. 

What is Bill’s pass-through deduction?


Taxable Income $475,000 * .20 = $95,000

MH Community QBI $100,000 *.20 = $20,000

MH W-2 Wages $38,000 * .50 = $19,000

MH W-2 Wages $38,000 * .25 = $9,500

Unadjusted basis of qualified acquired property $165,000 * .025 = $4,125


Greater of 50 percent W-2 Wages or 25 percent W-2 wages plus 2.5% acquired property:

$19,000 > $13,625 ($9,500 + $4,125)

Lesser of 20 percent QBI compared to, in this example, 50 percent of W-2 Wages:

$20,000 > $19,000

Lesser of 20 percent of Taxable Income compared to, in this example, 50 percent of W-2 Wages

$95,000 > $19,000

B’s pass-through deduction is $19,000

I told you I promised lots of Excel fun.             

Don’t Forget Your Allocable Share:

For both 50 percent W-2 wages and the 25 percent W-2 wages, plus 2.5 percent of acquired qualified property limits, the taxpayer can only calculate those numbers based on their allocable share.  Now if the business only has one owner that all income flows through to, then, yes, the owner determines his or her numbers by using all W-2 wages and qualified property of the business. 

But if the business has multiple owners, like a partnership, shareholders (S-Corp), or members (LLC), then each taxpayer must determine their allocable share and factor that against the business’ W-2 wages and qualified property.

Determining an allocable share would normally vary in complexity depending on the entity, with some complicated partnerships agreements taking the cake.  But Section 199(A)(f)(1) takes all the super complexity out and thankfully leaves us with just something mildly complex. 

For a partnership or S-Corp the allocable share of W-2 wages is the same share the partner or shareholder receives for wage expenses.

For a partnership, the allocable share of the unadjusted basis immediately after the acquisition of qualified property is determined in the same way the partner’s share of depreciation is calculated. For an S-Corp the allocable share is the shareholders pro rate share of an item.

Allocable Share Example:

Let’s stick with the same numbers as the last example, except this time the MH community business is a partnership between Bill, Cathy, and Doug.  We are calculating Bill’s deduction.  In the partnership agreement, the partners all have an equal one-third (33.33%) share in income and expenses.  However, Bill is more the sweat equity partner while Cathy and Doug are more the money investors, so the partnership agreement says Bill gets 10 percent of the partnership depreciation, and Cathy and Doug split the remaining 90 percent. 

What’s Bill’s allocable share?

Bill’s Allocable Share of QBI is $100,000 * .3333 = $33,333

Bill’s Allocable Share of W-2 Wages is $38,000 * .3333 = $12,665

Bill’s Allocable Share of Acquired Property is $165,000 * .10 = $16,500

Now what is Bill’s pass-through deduction?

QBI $33,333 * .20 = $6,666        

50 percent wages are $12,665 * .50 = $6,333

25 percent wages and 2.5 property is ($12,666 * .25) + ($16,500 *.025) = $3,166 + 413 = $3,579

$6,333 > $3,579

$6,666 > $6,333

Bill’s allocable share of the pass-through deduction is $6,333 because 50 percent of the wages is greater than 25 percent wages plus 2.5 percent property, and less than QBI multiplied by 20 percent.  And $6,333 is less than B’s taxable income multiplied by 20 percent ($95,000). 

Additional Items of Interest (come on, you know you are still interested):

Owning Multiple Eligible Businesses – What happens when a taxpayer has multiple eligible businesses?  How are multiple businesses considered?  The current consensus is the new law requires that each business be treated individually for each businesses’ applicable pass-through deduction and then each of those deductions are aggregated for the taxpayer. 

Assuming this interpretation continues to hold true, some taxpayers will need some detailed planning on exactly how their multiple businesses are run.  The eventual set up will all depend on the math and which configuration is most beneficial.  And this is especially true for those bigger taxpayers with taxable income over the threshold which brings into play both service business ineligibility and the W-2 and acquired property possible limitations. 

Ineligible “specified service trade or business” – As previously mentioned, if you or your spouse is involved in other businesses in the fields of: health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, investing services, investment management, trading, dealing in securities, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees, then, those businesses’ eligibility will depend on taxpayer income.  At or below $315,000, then the taxpayer receives the full 20 percent pass-through deduction regardless of the type of business.  Above $415,00 and the service related businesses are ineligible and the taxpayer does not get the new deduction.  Between $315,000 and $415,000 you get some deduction that is reduced as income approaches $415,000.

Taxable Income; Not Adjusted Gross Income Used – It is important to understand that when calculating various deductions, as well as determining if a taxpayer is under the $315,000 threshold, that the number we are looking at is the taxpayer’s total taxable income (not including the possible 20 percent pass-through deduction).  This is good. 

We do not use the taxpayer’s Adjusted Gross Income.  Why is taxable income better than AGI? 

Because taxable income is going to be lower than AGI.  AGI only subtracts from income the “above the line” deductions.  But total taxable income includes all the “above the line” deductions, plus all the “below the line” deductions like Itemized or Standard (which is now $24,000) personal deductions, as well as things like the now larger child tax credit.  The more deductions against income the better shot you have of being under the threshold.

What Did I Leave Out? – I know, I know you are thinking that there is no possible way I have left anything out.  Sadly, I have left quite a bit out.  I’m going to quickly mention some of them in case they might apply to a select few of you so you can double check with your accountants and lawyers.

Phase In – When dealing with the W-2 limitations and the “Magical Incomes Savings Threshold Clause” this article only addresses situations where income is below $315,000 or above $415,000.  Within the $100,000 range a taxpayer must calculate an applicable percentage of the W-2 limitation because the limit is “phased-in” as income climbs.  At $415,000 and above the taxpayer is the subject the full limits of the W-2 wage limitations.  This same phase-in range between $315,000 and $415,000 also applies when determining if a specified service trade or business is eligible for the pass-through deduction. The detailed discussion of the phase-in provisions is left for another day.     

Impact and Planning with Self-Employment Taxes – In many cases there are going to be other things to consider when you start considering types of entity structures and relationships with W-2 wages including paying or not paying yourself wages.  The possible impact on triggering self-employment taxes that you might not otherwise be paying, or are paying in low amounts.  Expert help will be needed to run the numbers to see which is more beneficial for each individual weighing the possible new pass-through deduction against any increase in self-employment taxes that might be needed to generate the pass-through deduction. 


I’m exhausted; I have no conclusions. Ok, not really. 

The conclusion I have is that this new deduction is going to reduce the taxes on the majority of businesses in the MH retail, community, and lending industries. 

The big boy corporations won’t get it, but remember they are far from being left out in the cold; their tax rate dropped from 35 percent to 21 percent.  Not to mention there are still more things to discuss in the bonus depreciation and new “full expensing” provisions of the new law.

While there was arguably some simplification of the IRC with things like doubling the standard deduction this pass-through deduction, while a nice tax reduction, is far from simple. The new law will require better record keeping, monitoring throughout the year, some changes to some businesses and the need for expert advice and counsel – which, again, is not from me, but from your own lawyers and accountants who are steeped in tax law experience and understand the new provisions far better than me.

For those that made it this far, here is your after the credits treat - a wildly gross oversimplification of an exceedingly complex new law that makes vast assumptions and disregards huge swaths of law as to be completely unreliable:

Gross Oversimplification Quasi-Summary

  • For those in our MH industry as active retailers, MH community owners/operators, and lenders that operate as a pass-through business (sole proprietor, partnership, LLC, S-Corp) you are going to be entitled to a new 20 percent deduction off your business pass-through income.
  • If your taxable income is at or below $315,000, then your deduction is determined by taking your business operating income less your business operating expenses, business investment income and any W-2 wages you pay yourself (i.e. QBI) and multiplying that number by 20 percent. Compare that number to 20 percent of your total taxable income.  Whichever one is less, that’s your deduction.
  • If your taxable income is more than $315,000, but less than $415,000, you must consult with your accountant. Within this $100,000 range there is a strong likelihood you will still receive some amount of deduction, but the exact calculations will depend on your unique situation.
  • If your taxable income is above $415,000, then you must make four calculations rather than only two.
    1. Your QBI (business operating income less your business operating expenses, business investment income and any W-2 wages you pay yourself) multiplied by 20 percent.
    2. 50 percent of the total (which includes any wages you pay yourself) amount of W-2 wages the business pays.
    3. 25 percent of W-2 wages the business pays, plus 2.5 percent of available depreciable property bought by the business that is used in the production of business income that has not fully depreciated using the original property acquisition cost when the business first bought the property.
    4. Your taxable income multiplied by 20 percent.

Then compare: Which is bigger between (2) and (3)? Then compare the bigger of (2) and (3) to (1), which is smaller/less?  Then compare the smaller to (4), which is smaller?  The smaller is your deduction.