Passed in 2017, the Tax Cut and Jobs Act includes a new qualified business income (QBI) deduction that could have an effect on what you pay. There are several variables that may mean a big write-off, a modest one or perhaps none at all.
QBI is the net amount of qualified income, gain deduction and loss from any qualified trade or business.
In lowering the rate that C corporations pay to 21 percent, the government has also devised a way to reduce the tax rate paid by sole proprietorships, partnerships, LLCs and S corporations. The Section 199A deduction can be as much as 20 percent of your QBI. For example, if a business owner in a top tax bracket of 37 percent qualifies, his or her effective tax rate becomes 29.6 percent.
Capital gains and losses, dividends, and interest income do not qualify. Neither do wages to S-corp owners or guaranteed payments to partners and Limited Liability Corporation (LLC)? members.
The deduction is simple for some and complicated for others. It all depends on your taxable income. For business owners with a 2018 taxable income of no more than $315,000 on a joint return, or $157,000 on a single? return, the deduction is 20 percent of QBI. The deduction has additional limitations for those operating in specified service trades or businesses (SSTB) with taxable income over the threshold amount.
Business that falls into the SSTB category include those providing services in health, law, accounting, actuarial science, the performing arts, consulting, athletics, financial services, investing, trading and dealing in certain assets. The category also includes any trade or business where the principle asset is the reputation or skill of one or more of its employees.
For an SSTB, W-2 wages that fall under QBI are reduced proportionately by taxable income over the threshold amount. Usable excess taxable income is limited to $100,000 on a join return and $50,000 for other filers. When taxable income hits $415,000 for joint filers, or $207,500 for others, no QBI deduction can be taken by an SSTB.
When a taxpayer owns more than one pass-through business, the deduction is figured independently on each one and totals are added together. However, regulations allow taxpayers to aggregate income situations to optimize the QBI deduction. In the case of a loss for the year, there would be no QBI deduction. But also note that the loss is carried forward and will reduce QBI the following year.
Because the QBI is new, there is plenty of information—including calculators, forms and detailed instructions—to help you handle this write-off. I recommend going to the IRS FAQ page on the Section 199A deduction and seeking the advice of a tax professional to determine whether you qualify for the QBI deduction.
Who knows? Some savings may be in your future.
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