Who qualifies for the 20% QBI deduction?
Individual taxpayers with ownership in businesses can claim a maximum 20% business income deduction depending on many factors.
Pass-through entities such as partnerships and S corporation don’t claim the deduction themselves. Each partner or shareholder’s share of qualified business income (QBI) is reported on their Schedule K-1. The taxpayer claims the amount of their QBI from their K-1 on their personal tax return. More simply stated, taxpayers who are partners or shareholders receive the benefit of the QBI deduction when they file their income tax return.
Businesses entities other than a C-corporation qualify for the QBI deduction. Pass-through entities which include partnerships, S-corp, Limited Liability Companies(LLC), or a trust that owns an interest in a pass-through entity. Sole proprietorships also qualify for the QBI deduction. Rental income qualifies in certain circumstances. However, this is a complex issue and is beyond the scope of this column.
The amount of QBI deduction depends on whether your taxable income exceeds the annual taxable income threshold (for 2019, $321,400 if married filing jointly, or $160,700 if single). If your taxable income is less than the threshold amount, the QBI deduction is the lesser of 20% of your qualified business income or taxable income.
If your taxable income is greater than the threshold amount, the calculation of the deduction depends on whether your business 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.
If your business is an SSTB and your income exceeds the threshold amount, your QBI deduction is gradually phased out.
If your business is not an SSTB, and your income exceeds the threshold amount, the QBI deduction is limited. The maximum deduction is 20% of your QBI. However, your deduction can not exceed the greater of:
50% of your share of W-2employee wages paid by the business, or
25% W-2 wages plus 2.5% of the acquisition cost of depreciable property used in the business.
Consequently, if you are in the threshold range and have no employees or depreciable property, you get no deduction. This encourages hiring employees and purchasing assets and equipment.
Generally, QBI is determined separately for each separate business you own.
This article is intended to provide a very brief summary of the QBI. The latest version of the Tax Cuts and Jobs Act (TCJA) as published in the Federal Register on February 8, 2019, is 247 pages.
David Zubler is a tax accountant in East Tennessee, the author of three tax 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.
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.