Can you take advantage of the QBI deduction?

Office
12019 / Pixabay

The Tax Cuts and Jobs Act brought some changes to 2018 tax returns, allowing owners of pass-through entities to take advantage of a large deduction for qualified business income (QBI).

So, what do these changes mean moving forward for owners of these types of businesses? Well, that depends. This deduction has limitations, so there are many factors to consider.

Here are a few questions to help you determine whether your business can benefit from this deduction.

What is the QBI deduction?

The qualified business income (QBI) deduction was introduced as part of the Tax Cuts and Jobs Act in 2017. Also known as Section 199A, it first appeared on 2018 returns and will continue until 2025. It allows owners of pass-through entities– S Corps, partnerships, and sole proprietorships to deduct up to 20 percent of QBI.

QBI refers to the net amount of qualified income, gain, deduction and loss from a pass-through entity. It is treated as an allowable itemized deduction because it does not reduce adjusted gross income (AGI).

Are there limitations?

Because it only applies to “individuals” and not corporations, there are limitations to the deduction. Eligibility is determined by both type of business and amount of income.

It does not include:

  • Business income earned outside the US
  • Capital gains or losses
  • Dividends
  • Interest income
  • Wages paid to an S corporation owner
  • Self-employment tax deduction

Eligibility is also determined by the business owner’s personal taxable income, which must fall below specific amounts defined by the IRS.  For 2019, amounts between $160,700 to $210,700 for single filers and $321,400 to $421,400 for joint filers are subject to limitations or may not be qualified.

There are also limitations for owners of specified service-based businesses, which include but are not limited to accountants, financial advisors, investment managers, consulting firms, professional athletes, law firms, and medical practices. For these types of businesses, the owner’s personal taxable income comes into play.

How do you know if you can take advantage of this deduction?

This complex deduction can get tricky, but ultimately there are two important questions to ask:

  1. Do you have a specified service trade business?
  2. What is your total taxable income for the year?

The answers to these two questions lead to other questions, which will determine whether you can receive the full 20 percent deduction, a partial deduction, or no deduction at all.

While the QBI deduction can be quite complicated, it provides a great tax incentive for qualified small business owners. Fortunately, there are experts who can help. If you have more questions about the QBI deduction, give us a call!