What is the QBI deduction
With the changes to the tax law, people are still unsure about how the changes apply to them. One of the changes from new tax laws is the 20% QBI deduction, which is fairly complex. Over the next few weeks, I will try to simplify the Qualified Business Income(QBI) deduction.
Qualified business income is generally defined as the net amount of income, gain, deduction, and loss with respect to any qualified trade or business of the taxpayer. Or simply stated QBI is the profit received from a pass-through business or sole proprietorship during the year.
The 20% business deduction (QBI deduction) is affected by many circumstances and factors, so determining the best tax entity and tax strategy can be very challenging.
C-corporations do not qualify for the 20% business deduction. The TJTC tax law changed the rate of taxation to a flat 21% rate for C-corps. This was a huge tax deduction for large C-corps. Unfortunately, if you have a C-corporation with a profit of $90,000 or less, your taxes will increase because the tax rate on the first $50,000 of profit was 15%. As a result of this change in tax rate, a C-corporations taxes could increase by as much as $3,000. Consequently, you may want to consider changing to a different business entity.
Business entities that qualify for the 20% business deduction include sole proprietorships and pass-through entities which include partnerships, S-corp, Limited Liability Companies(LLC), or a trust that owns an interest in a pass-through entity.
The Schedule C, which is used by sole proprietors to report their business income and expenses, is used to determine the amount of QBI. Schedule E is used to determine rental property profit and QBI. However, not all rental activity is Qualified Business Income. The Schedule F is used to determine the QBI from farming. Partnership, LLC’s and S-corp owners will receive a Form K-1 which will report information needed for calculating the QBI deduction.
You might have been thinking it’s great that businesses are getting a 20% deduction, but not all Qualified Business Income results in the QBI deduction. The QBI deduction is based on the lesser of the QBI or taxable income so some businesses won’t receive as large of a deduction as anticipated, and some won’t get any deduction.
Additionally, the QBI deduction is phased out at certain income levels. The phaseout rules depend on whether the entity is a specified service trade and/or business (SSTB). An SSTB is any trade or business involving the performance of service in the fields of health, law, consulting, athletics, financial services or where the principal asset of the trade is the reputation of one or more of its employees or owners.
David Zubler is a tax accountant in East Tennessee, the author of three books, and a philanthropist. All of his proceeds from the books go to a charitable foundation he created for underprivileged children. He is also the founder of Your Tax Care which provides tax education. David can be reached for questions and consultation at yourtaxcare.com.