As a savvy business owner, you are always on the lookout for additional tax deductions. Keeping up with the latest changes in the tax code, while rewarding, can be time-consuming. But don’t worry, that’s our job!
One new deduction many of our clients are taking advantage of is the qualified business income deduction (QBI). Introduced in the Tax Cuts and Jobs Act of 2017, this provision allows deductions up to 20% of your qualified business income.
Does Your Business Qualify?
The QBI deduction is only available for pass-through businesses, such as sole proprietors, partnerships, S corporations, trusts, and estates.
A business classified as a specified service trade or business (SSTB), which is a company typically built on the reputation or skill of one or more of its employees or owners, may also take advantage of the QBI deduction; however, it is limited to income thresholds. Examples of SSTBs include firms practicing in the areas of law, accounting, actuarial science, performing arts, consulting, athletics, financial services, investing and investment management.
In addition, some real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income may also qualify. In some cases, your rental property income may qualify for this deduction under a “safe harbor” rule.
This deduction acts like a tax cut to pass-through entities, whose owners pay tax on business income through their personal tax returns.
The law outlined a limited period (2018 – 2025) during which qualified businesses could take advantage of the deduction. If you missed this deduction when you filed your 2018 tax returns, it’s not too late. You can still file an amended return and take advantage of the savings if you qualify.
Do You Qualify?
As a business owner of a qualified business, if your total taxable income is below certain income thresholds (for individuals and those filing a joint return) you are entitled to the full deduction.
This level changes slightly each year, so it is important to confirm your eligibility annually. For the 2019 tax period, the deduction can start to phase out at income levels of $160,700 for individuals and $321,400 for business owners filing a joint return. Above this threshold, there are limitations on the allowable deduction percentage based on the type of business and the amount of other income. Once your taxable income reaches $210,700 for individuals and $421,400 for joint filers, the deduction for SSTBs is phased out.
Not All Income is Included
There are a few other stipulations to keep in mind if you plan on taking advantage of the QBI deduction. Not all forms of income can be included in the calculation of your net QBI.
You may not count any income from outside the United States, investments, W-2 income wages paid to you as the owner of an S corporation or guaranteed payments to a partner.
The QIB Deduction May Be a Limited Time Offer
The QBI deduction may, in fact, be an exploding offer. The law which created this deduction states this will only be in effect until the 2025 tax year. After that, the future is unclear whether this deduction will be extended.
Start Planning Now
Depending on your situation, there may even be additional income that is also excluded or included. This makes having a trusted tax preparation firm a tremendous asset in helping you clarify confusing tax codes.
For almost 40 years, Slattery & Holman has built a strong reputation for quality service and sound financial advice. Together, we can outline a financial strategy and help you make the best decisions to take advantage of your QBI deduction while you can.