Small businesses are a significant part of the U.S. economy. According to the United States Small Business Administration, they generate around 44% of our gross domestic product. They also create jobs, drive innovation, and contribute to the communities in which they operate.
To help small businesses continue to thrive, the U.S. tax code provides several tax breaks and incentives. One of the newer incentives is Section 199A of the tax code, also known as the qualified business income deduction.
However, understanding who can claim the deduction and calculating the amount to deduct is no easy task.
What Is the Qualified Business Income Deduction?
The qualified business income deduction allows certain businesses to claim a tax break worth up to 20% of its “qualified business income.”
For many businesses, qualified business income (QBI) is the same as net income. However, there are several types of income that don’t count as QBI. The list includes investment income, such as dividends and capital gains. It also includes income from businesses located outside of the U.S. For a full list of the income types that don’t qualify, check out the IRS qualified business income deduction fact page.
Pro tip: If you have any questions about the QBI deduction and how it might affect your taxes, contact a tax advisor from H&R Block. You chat online with a tax expert and have all your questions answered.
Who Can Claim the QBI Deduction?
The QBI deduction is for owners of pass-through businesses, including sole proprietors, partnerships, LLCs, and S corporations. The term “pass-through” refers to the way these companies are taxed. In a pass-through business, income “passes through” to the owner, who pays income tax on the business income on their individual income tax return.
The QBI deduction isn’t available to C corporations or LLCs that elect to be taxed as a C corporation.
It sounds pretty straightforward. But once you’ve established that your business is a pass-through, you need to know about income limits, specified service trades or businesses, W-2 wages, qualified property, and an overall limitation. Let’s tackle each of these one at a time.
Taxpayers with total income less than $315,000 for married couples filing jointly or $157,500 for single taxpayers can claim the 20% deduction from qualified business income.
Specified Service Trade or Business
If your taxable income is between $315,000 and $415,000 if married filing jointly or $157,500 and $207,500 for single filers, you need to determine whether your business is a specified service trade or business (SSTB).
An SSTB includes any service-based business other than engineering or architecture in which the company depends on the employees’ or owners’ reputation or skill. That’s a broad definition, but it typically includes doctors, lawyers, accountants, consultants, professional athletes, financial advisors, performers, investment managers, and similar occupations.
The IRS’s frequently asked questions page for the QBI deduction includes additional information to help you figure out whether your business is an SSTB. Once you figure that out:
- If Your Business Is an SSTB: If your total taxable income is between $315,000 and $415,000 for married couples filing jointly or $157,500 and $207,500 for single taxpayers, the IRS limits your QBI deduction based on the business’ W-2 wages and qualified property. If your income is above that upper limit ($415,000 for married couples or $207,500 for single filers), you cannot claim a QBI deduction.
- If Your Business Is Not an SSTB: If your total taxable income is between $315,000 and $415,000 for married couples filing jointly or $157,500 and $207,500 for single taxpayers, you can claim the full 20% QBI deduction. If your income is above that upper limit ($415,000 for married couples or $207,500 for single filers), the IRS may limit your QBI deduction based on your W-2 wages or qualified property.
W-2 Wage & Qualified Property Limitation
For SSTB business owners with income between the phase-out limits and non-SSTB business owners with taxable income over
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For the Full Article –
You can Find it Here: How to Use the Qualified Business Income Deduction to Reduce Taxes