The Tax Cuts and Jobs Act passed by Congress in December 2017 introduced more changes to the U.S. tax law than had been seen in more than 30 years. One of the most widely-anticipated changes is the Qualified Business Income (QBI) Deduction.
This tax-opportunity is complicated, and there are clarifications that the IRS will need to provide. Below is a basic overview of the deduction and its limitations.
What is Qualified Business Income (QBI)?
The QBI deduction is not a deduction for businesses; rather, it is a deduction for business owners. This deduction is available to taxpayers who have QBI from a partnership, an S corporation, LLC or a sole proprietorship.
QBI is defined as domestic business income other than investment income connected with a qualified trade or business. QBI does not include investment income, such as dividends or capital gains. If the taxpayer’s QBI results in a loss, the loss can be carried over to the next year to offset future positive QBI.
Limitations to the QBI Deduction
- The deduction equals the lesser of the combined qualified business income of the taxpayer or 20% of the taxable income (reduced by net capital gain), plus the lesser of 20% of qualified cooperative dividends or taxable income.
- Individuals whose businesses are “specified service” businesses will lose some or all of their deduction if their taxable income is too high. Specified service businesses are those in health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services and brokerage services or where the principal asset is the reputation or skill of one or more employees or owners.If a taxpayer is married and filing jointly and their taxable income exceeds $315,000, their deduction will be limited, and it will be phased out completely when their taxable income reaches $415,000. For all other filers, the lower threshold is $157,500 and the higher threshold is $207,500.
- There is also a property limitation that applies to taxpayers when their taxable income exceeds the lower thresholds above, and phases in completely when they reach the maximum thresholds. For high-income taxpayers subject to this limitation, their deduction is calculated to be the greater of:
(1) 50% of the W-2 wages in the business; or
(2) The sum of 25% of the W-2 wages in the business and 2.5% of the unadjusted basis in depreciable business property.
The calculation for this deduction is complex, and there is still more guidance needed from the IRS. The IRS is expected to release their interpretations of the law, and until they do, there are still a few unknowns.
As additional guidance becomes available, you should consult with your tax advisor and determine whether this will be beneficial to you.
If you have any questions, please contact BSSF today!
ABOUT THE AUTHOR
Randy is a Principal and the Tax Director at Brown Schultz Sheridan & Fritz and is one of the key members of the Firm’s Tax Department. He is responsible for managing tax consulting and compliance services for his clients as well as overseeing the tax department.