The 2017 Tax Cuts and Jobs Act changed a lot of the tax norms in this country. One provision that many business owners will benefit from is the Qualified Business Income Deduction, also known as Section 199A.
This allows certain sole proprietors, owners of S Corporations and partnerships to deduct up to 20% of their qualified business income (QBI) from their taxable income as long as it comes from a qualified business or trade.
There are two limitations to this provision. Taxpayers must utilize the one that deducts the least. In the first component, calculate 20% of your client’s QBI, and add that to 20% of qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income.
In the second limitation, calculate 20% of your client’s taxable income minus net capital gains.
What is a Qualified Business?
Pretty much all businesses are considered qualifying businesses, except for companies that offer a service, referred to as Specified Service Businesses, in which the principal asset is the reputation of an employee; examples include health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, investing and investment management, trading.
What is Qualified Business Income?
Qualified business income (QBI) is defined by the IRS as the net number of qualified items of income, gain, deduction and loss from any qualified trade or business. Part of the QBID calculation also requires that business income be reduced by three items: deductible part of self-employment tax, the self-employed health insurance deduction and contributions to qualified retirement plans.
Are there income requirements?
This deduction can be limited by income requirements. When the taxable income is above the threshold amounts, the deduction is subject to additional limitations. These limitations are the greater of either 50% of the W-2 wages that were paid by the entity generating the QBI or 25% of the W-2 wages paid by the entity generating the QBI plus 2.5% of the Unadjusted Basis of the Qualified Assets that are in service in the entity generating the QBI.
If the taxpayer is a Specified ServiceBusiness, the QBID is subject to the above limitations along with a Phase Outreduction. This eliminates the deduction once the taxable income (before consideration of QBID) exceeds the threshold amounts by $50,000 ($100,000 for MFJ).
For couples with married filing jointly status, their collective taxable income must be below $315,000 and for every other filing status, it must be below $157,500 before considering the QualifiedBusiness Income Deduction in order to qualify for this deduction.
At TaxSlayer Pro, we are dedicated to helping tax professionals succeed in their businesses. To learn more about recent tax law changes and other business tax deductions, please contact our tax experts today!