If you own a business, the Qualified Business Income Deduction (QBI) can have a big effect on your tax bill. This benefit, which was added as part of the 2017 tax reform, is a good tax break for many people, but it can be hard to figure out how it works.
The goal of this article is to explain the QBI deduction clearly to busy workers. Talking to a CPA in Port Jefferson Station, Long Island, about your business taxes, including how to get the most out of the QBI benefit, could help you.
What is the QBI deduction?
At its core, the QBI credit lets eligible business owners take a chunk of their qualified business income off of their taxed income. By this, it means that your total tax bill might go down.
Are you qualified for the QBI deduction?
People who own pass-through businesses are most likely to be able to take advantage of the QBI deduction. Businesses like sole proprietorships, partnerships, and S companies “pass-through” their earnings to the tax returns of the owners.
In this case, the owners report the business income on their own tax forms and pay taxes at their own personal income tax rates. The business itself does not pay taxes.
How much can you deduct?
Most of the time, you can subtract up to 20% of your approved business income. With that said, there are some limits to this exclusion. It is important to note that it can not be more than 20% of your total taxed income minus any net capital gains (profits from selling stocks).
Understand the limitations.
Many people can get a big tax break from the QBI credit, but some service-based businesses may have trouble using it. Depending on how much money they make from taxes, these “specified service trades or businesses” (SSTBs) may not be able to claim as much or at all.
What are SSTBs?
For the most part, SSTBs are service businesses where the value of the service depends on the skills or character of the owners or workers. Some examples are:
- Law firms: An attorney’s name and level of experience are very important when it comes to getting new clients.
- Accounting firms: Often, clients depend on the skills and dependability of accountants and their staff.
- Consulting firms: The information and experience of experts are often what make advising services valuable.
- Financial services: Investment advisors, financial managers, and other financial experts depend on their knowledge and image a lot of the time.
The QBI deduction for SSTBs.
When an owner of an SSTB makes more than a certain amount of taxable income, the QBI benefit may be limited or phased out completely. These limits change based on whether the individual is single or married and filing jointly.
- Start of the phase-out period: As taxable income rises above a certain level, the exemption slowly ends.
- Complete phase-out: If an SSTB’s income goes up, the QBI benefit may not be available at all.
Key things to consider.
- Taxable income: The amount of your taxable income has a big effect on your QBI deduction, especially if you have an SSTB.
- Filing status: Depending on how you file (single, married, filing jointly, etc.), the income limits that decide if the QBI credit is available to you and what it can not do are different.
- Tax laws: Tax rules can change. It is important to know about any changes or improvements to the QBI deduction rules.
The bottom line.
Many business owners can save a lot of money on their taxes by taking advantage of the QBI credit. Still, it is important to know the rules and restrictions that apply to your case, especially if you run an SSTB.
Talking to a trained tax professional can help you understand the QBI benefits and make sure you stay within the tax rules while saving as much money as possible.
