Tax & Business Alert –
February 2024
429
words
Abstract:
The qualified business income (QBI)
deduction, authorized by the Tax Cuts and Jobs Act (TCJA), is available to owners of pass-through entities
— such as S corporations, partnerships and limited
liability companies (LLCs) — as well as self-employed individuals. This article
highlights how the QBI deduction works and explains that it’s only available for a limited
time, unless Congress takes further legislative action.
How to secure a tax benefit with the QBI
deduction
QBI
may sound like the name of a TV quiz show. But it’s actually
the acronym for “qualified business income,” which can trigger a tax
deduction for some small business owners or self-employed individuals. The QBI
deduction was authorized by the Tax Cuts and Jobs Act (TCJA), and it took
effect in 2018.
How it works
The
deduction is still available to owners of pass-through entities — such as S
corporations, partnerships and limited liability
companies — as well as self-employed individuals. But it is scheduled to expire
after 2025 unless Congress acts to extend it.
The
maximum deduction is equal to 20% of QBI. Generally, QBI refers to your net
profit, excluding capital gains and losses, dividends and interest income,
employee compensation and guaranteed payments to partners. The deduction can be
claimed whether or not you itemize.
Notably,
the QBI deduction is subject to a phaseout based on your income. If your total
taxable income is below the lowest threshold, you may be entitled to the full 20%
deduction although other limitations do apply.
But things get tricky
if your income exceeds the applicable threshold. In that case, your ability to
claim the QBI deduction depends on the nature of your business.
Specifically, the rules
are different for regular business owners of pass-through entities, sole
proprietors and those who are in “specified
service trades or businesses” (SSTBs). This covers most business
people who provide personal services to the public, such as physicians, attorneys,
financial planners and accountants. (Engineers and architects are excluded). Professionals
in this group forfeit the QBI deduction entirely if income exceeds another set
of limits.
If
your income falls between the thresholds stated above, your QBI deduction is
reduced, regardless of whether you’re in an SSTB or not. For taxpayers who are
in SSTBs, the deduction is phased out until it disappears at the upper income
threshold. For other taxpayers, the deduction is limited to the lesser of 20%
of QBI or the greater of 1) 50% of the wages paid to employees on W-2s, or 2)
25% of wages plus 2.5% of the unadjusted basis of the qualified property owned
by the business.
Available for a limited time
The
QBI deduction provides a valuable tax break for small business owners, so if it
expires, their taxes are likely to go up. It’s unclear at this time whether the
deduction has a chance of being extended. Contact us for guidance in
determining the best strategy for your personal situation.
©
2024