There is a lot of confusion surrounding the new Section 199A Qualified Business Income Deduction. Let’s try to shed light on this new rule.
What is QBI?
The qualified business income (QBI) deduction provides a significant opportunity for business owners to cut their federal income tax bill. QBI was designed to lower the effective tax rate on owners of pass-through entities, the write-off can be as much as 20% of QBI. The deduction is based on the amount of your qualified business income. This is essentially your profits from a pass-through trade or business. However, QBI does not include certain items that you do factor into your net income for determining what you pay income tax on. Consider these key factors , how they may apply to you, and what questions you may want to explore further:
- A qualified business is any business except those “specified service businesses” and the income earned an employee, from guaranteed payments or personal interest, dividends or capital gains.
- The specified service businesses can include: health, law, accounting, consulting, brokerage services, financial services, and others, but exclude architects and engineers.
- It is available to sole proprietors and owners of pass-through entities such as S-Corps, LLCs, and partnerships.
- It is subject to limitation based on the taxpayer’s income and the type of business.
- The deduction reduces your taxable income, but not your adjusted gross income and can be taken regardless of whether you itemize deductions.
To get the full benefit of the deduction, and not be subject to further wage and capital limitations, taxable income must be no greater than $315,000 for married filing jointly (phases-out through $415,000); and $157,500 for single or married filing separately (phases out through $207,500). For example, if you are a sole proprietor with a net profit of $90,000 (and no excluded items) on your Schedule C and your taxable income is $100,000 (no capital gains), your QBI deduction is $18,000 ($90,000 x 20%).
If you are a business owner and are trying to determine to what extent you qualify for the Section 199A Qualified Business Income Deduction, please contact our office today to schedule a consultation.