Securing Tax Benefits with the QBI Deduction

QBI stands for “qualified business income,” a significant concept that could lead to tax deductions for certain small business owners or self-employed individuals.

Enacted as part of the Tax Cuts and Jobs Act (TCJA) in 2017, the QBI deduction came into effect in 2018, offering potential tax relief for eligible taxpayers.

Understanding How It Works

The QBI deduction remains accessible to owners of pass-through entities, such as S corporations, partnerships, and limited liability companies, as well as self-employed individuals. However, it’s important to note that this deduction is set to expire after 2025 unless Congress intervenes to extend it.

The maximum deduction amounts to 20% of QBI. Generally, QBI encompasses your net profit, excluding capital gains and losses, dividends and interest income, employee compensation, and guaranteed payments to partners. Importantly, this deduction can be claimed whether or not you choose to itemize deductions on your tax return.

However, it’s essential to be aware that the QBI deduction is subject to a phaseout based on your income level. If your total taxable income falls below the lowest threshold, you may be entitled to claim the full 20% deduction.

Yet, certain limitations come into play:

• For the tax year 2023, the thresholds stand at $182,100 for single filers and $364,200 for joint filers.
• For the tax year 2024, the thresholds increase to $191,950 for single filers and $383,900 for joint filers.

Navigating Income Thresholds and Business Nature

Things can become intricate if your income surpasses the applicable threshold. In such scenarios, your eligibility for claiming the QBI deduction hinges on the nature of your business.

Distinct rules apply to regular business owners of pass-through entities, sole proprietors, and those categorized under “specified service trades or businesses” (SSTBs). This category encompasses professionals who provide personal services to the public, such as physicians, attorneys, financial planners, and accountants (excluding engineers and architects).

For individuals in this group, the QBI deduction is forfeited entirely if income exceeds a separate set of upper limits:

• For the tax year 2023, these upper limits are $232,100 for single filers and $464,200 for joint filers.
• For the tax year 2024, these upper limits rise to $241,950 for single filers and $483,900 for joint filers.

For individuals whose income falls between the aforementioned thresholds, their QBI deduction may face reduction, irrespective of SSTB status. In the case of SSTB taxpayers, the deduction phases out until it completely vanishes at the upper income threshold. Conversely, for other taxpayers, the deduction is capped at the lower of 20% of QBI or the greater of either 1) 50% of the wages paid to employees on W-2s, or 2) 25% of wages plus 2.5% of the unadjusted basis of qualified property owned by the business.

An Important Note on Availability

The QBI deduction serves as a valuable tax incentive for small business owners. However, its temporary nature means that if it expires, taxes for these individuals are likely to increase. The likelihood of the deduction being extended remains uncertain. Therefore, seeking guidance from tax professionals to determine the best strategy for your personal circumstances is crucial.

Conclusion

The QBI deduction offers a valuable opportunity for eligible taxpayers to reduce their tax burden. By understanding the nuances of income thresholds and business classifications, individuals can navigate the complexities of the tax code and potentially secure significant tax benefits. As tax laws evolve, staying informed and seeking expert advice will be essential to maximize tax savings and ensure compliance with regulations.

Contact the office of Jacksonville Accounting Firm Erwin, Fountain, & Jackson P.A. We can discuss in more detail how to secure tax benefits with the QBI deduction.