Unlocking Tax Savings with the Qualified Business Income (QBI) Deduction
As a business owner, every opportunity to reduce your tax bill is essential, and one of the most advantageous deductions available is the Qualified Business Income (QBI) deduction, often referred to as the "Section 199A deduction."
Understanding Qualified Business Income (QBI)
Qualified Business Income or QBI is essentially the net income or loss derived from a trade or business. This encompasses income from partnerships, S-corporations, sole proprietorships, and certain trusts. QBI forms the basis for determining your eligibility for the QBI deduction.
Typically, QBI includes deductions for self-employed health insurance, self-employment taxes, and contributions to retirement plans such as SIMPLE or SEP plans. However, several items are excluded from QBI calculations, like non-taxable income, capital gains or losses, wage income, and certain types of interest income, among others. Always verify the exclusions from the IRS to ensure you’re calculating correctly.
The QBI Deduction Explained
Introduced by the Tax Cuts and Jobs Act (TCJA) in 2017, the QBI deduction allows eligible business owners to potentially save a significant amount on their federal taxes.
The deduction has two main components:
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QBI Component: This allows up to a 20% deduction on your QBI, subject to limitations based on your trade or business type, W-2 wages paid, and the unadjusted basis immediately after acquisition (UBIA) of business property.
- REIT/PTP Component: This allows a 20% deduction on qualified REIT dividends and PTP income. Unlike the QBI component, this isn’t influenced by W-2 wages or UBIA but can still be subject to income-based limits.
In essence, your total deduction is the lesser of the sum of both components or 20% of your taxable income minus net capital gains.
Duration of the QBI Deduction
The QBI deduction applies to tax years starting from January 1, 2018, and is set to expire on December 31, 2025. This means there’s a limited window to maximize these tax savings. Remember, post-2025, other tax deductions can still help in reducing your small business taxes.
Eligibility Criteria for the QBI Deduction
Not all businesses qualify for the QBI deduction. Here’s what you need to know:
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Eligible Entities: Sole proprietorships, partnerships, S-corporations, and some trusts and estates can claim the QBI deduction. C-corporations are excluded.
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Income Earned: Income earned as an employee does not qualify. Moreover, specified service trades or businesses (SSTBs) need to meet certain income thresholds to qualify. SSTBs include fields like health, law, accounting, performing arts, and consulting, among others.
- Income Limits: As of 2023, single filers with income up to $182,100 and joint filers up to $364,200 qualify. These thresholds will rise slightly in 2024 to $191,950 for single filers and $383,900 for joint filers. If your income falls within the phase-out range, you might still be eligible for a reduced deduction.
Calculating Your QBI Deduction
Determining your QBI deduction involves several steps:
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Below Income Threshold: If you’re below the threshold, your QBI deduction is the smaller of:
- 20% of your QBI.
- 20% of your taxable income minus net capital gains and qualified dividends.
- Above Income Threshold: For those exceeding the threshold, the calculation adjusts to be the lesser of:
- 20% of your QBI.
- The greater of 50% of W-2 wages paid or 25% of W-2 wages paid plus 2.5% of UBIA.
Detailed record-keeping is crucial for accurately claiming the QBI deduction. Consult with a tax expert to ensure all potential deductions and credits are maximized.
Making the Most of Your Tax Filings
Whether you choose to self-file or enlist the help of a TurboTax expert, ensuring you claim every dollar you’re entitled to is paramount. TurboTax guarantees you the biggest possible refund, accounting for every eligible deduction, including the QBI deduction.
Embrace these insights and take control of your business finances to make your tax season less taxing and more rewarding.
