You may be eligible to take the deduction for qualified business income (QBI), a valuable tax break also known as the pass-through deduction, QBI deduction, or Section 199A deduction. Here are 10 things to know about the deduction:
- The QBI deduction is available to owners of sole proprietorships, partnerships, S corporations, and single member limited liability companies (LLCs). Trusts and estates may also claim the QBI deduction.
- A taxpayer’s QBI is the net amount of their qualified items of income, gain, deduction, and loss relating to any qualified business or trade. In order to be considered qualified, items of income, gain, deduction, and loss must be effectively connected with the conduct of a business or trade in the U.S. and must be included in computing taxable income.
- The purpose of the QBI deduction is to reduce the tax rate on QBI and bring it closer in line with the corporate tax rate.
- The QBI deduction is taken “below the line,” meaning that it will reduce your taxable income but not your adjusted gross income. However, the deduction is available regardless of whether you take the standard deduction or itemize your deductions.
- There are two components to the deduction:
- 20% of QBI from a domestic business, which must operate either as a sole proprietorship or through an S corporation, partnership, trust, or estate
- 20% of the taxpayer’s combined qualified publicly traded partnership income and qualified real estate investment trust (REIT) dividends
- Even if the trade or business is qualified, QBI isn’t necessarily equal to the net profit or loss from a business, since QBI must be adjusted by certain other gain or deduction items related to the business, in addition to the profit or loss from Schedule C.
- Any trade or business that isn’t a specified service trade or business (SSTB) is considered a qualified business. However, for taxpayers whose taxable income is under a threshold amount, SSTBs are treated as qualified trades or businesses.
- An SSTB is any trade or business where the principal asset is the reputation or skill of its employees or owners. SSTBS include accounting, financial services, brokerage services, actuarial science, investment, trading, consulting, law, health, certain performing arts, athletics, and dealing securities.
- The QBI deduction has limits based on W-2 wages, and there are also inflation-adjusted threshold amounts that apply for the purpose of applying the SSTB rules.
- The threshold amounts are $164,900 for single taxpayers and heads of household, $164,925 for those who are married filing separately, and $329,800 for those who are married filing jointly for tax years beginning in 2021.
- The limits phase in over a $50,000 range, or a $100,000 range for a joint return. The deduction reduces ratably so that the deduction is zero for income from an SSTB by the time you reach the top of the range, which is $214,900 for singles and heads of household, $214,925 for those married filing separately, and $429,800 for those married filing jointly.
- The pass-through deduction is calculated at the partner or shareholder level if a business is conducted as a partnership or S corporation.
As you’ve probably realized by now, claiming the QBI deduction is complex, especially if your taxable income is greater than the thresholds discussed above. If you have questions about taking the deduction, contact us today.