In 2017, Qualified Business Income (QBI) Section 199A Deduction was issued underneath the Tax Cuts and Jobs Act tax law. The purpose of this addition is to allow eligible taxpayers to deduct up to 20% of their QBI. Sounds interesting right? Well, let’s dive into more of what this deduction is and see if it applies to you.
Let's start with the basics
What is a Qualified Business Income Deduction?
Qualified Business Income (QBI) is defined by the IRS as “the net amount of qualified items of income, gain, deduction, and loss from any qualified trade or business, including income from partnerships, S corporations, sole proprietorships, and certain trusts”.
NOTE: This list only consists of a few items. It is important to do further research to see all things that are not QBI if you have any further inquiries
Items included in QBI
self-employed health insurance
deductions for contributions to qualified retirement plans
Items NOT included in QBI
capital gains or losses
Commodities transactions or foreign currency gains or losses
Income, loss, or deductions from notional principal contracts
guaranteed payments from a partnership
A deduction is the subtraction of an amount from your overall taxable income which lowers the amount of taxes you owe. Therefore, a qualified business income deduction is merely an amount that is subtracted from your overall taxable income and capital gains within your business taxes.
What is the QBI Section 199A Deduction?
As previously stated, This deduction allows eligible taxpayers
to deduct up to 20 percent of their QBI. For example, if you were a business owner and had $100,000 of taxable income, $20,000 of that income would no longer be subject to federal income tax
Real Estate Income Trust (REIT)
Publicly Traded Partnership (PTP)
Specified Service Trade or Business
provides services in accounting, health, law, actuarial science, athletics, brokerage services, consulting, financial services, the performing arts, investing, and investment management, trading, dealing in securities, partnership interests, or commodities
Who Does Not Qualify?
C Corporations do not qualify for the deduction as they already have a 21% flat rate. The deduction aids in equaling out the rates of C Corps and the businesses listed above
What Business Income Qualifies?
Apart from the QBI, this deduction looks at two other elements as QBI which qualifies them for the 20% deduction: Qualified Real Estate Investment Trust (REIT) dividends and Qualified Publicly Traded Partnership (PTP) Income
Qualified REIT Dividends
A REIT dividend is a dividend received from a company that owns or operates income-generating real estate, such as apartments, hotels, office buildings, or shopping centers.
Due to this deduction, QRI dividends are treated as qualified business income
Qualified PTP Income
A PTP is a partnership business who's ownership interests are traded on a solidified market like the stock exchange
The taxpayers income that comes from the PTP may include dividends, interest, rental income, or gains from the sale of partnership interests, among other sources.
Even though you may qualify for this deduction, there are several limitations and requirements to consider, so it is important to view all prevalent tax laws and regulations.
Limitations usually occur to taxpayers whose income is high and who have certain businesses. For the limitations below, keep in mind they usually refer to taxpayers with a taxable income that is above the yearly limit. It is advisable to consult with your tax provider regarding limitations that may apply to you
Here are a few to consider:
Type of Business - Certain SSTBs may be more limited to the deduction such as health, law, and accounting services. PTP income can also be limited depending on the type of PTP trade or business that qualifies.
W-2 Wages - the deductions can be limited based on wages paid to employees, the combination of wages, or the original cost of the qualified business property. This limitation primarily applies to businesses with limited employee wages or high capital investments
Excess Business Loss - excess business loss occurs when the total loss from all of your trades or business exceeds a certain range, disallowing the deduction
Limits for the deduction are provided yearly in Form 8995 along with instructions. Now, let's dive into how you can calculate this deduction
How Do I Calculate It for My Taxes?
Instructions for the deduction are included yearly in Form 8995. Here is a general process for calculating the deduction.
1. Determine your income
This would include your qualified business income and your adjusted gross income
If you are married and file jointly, make sure to include your spouse's wages as well
2. Claim your deductions
this prepares you to then calculate your modified taxable income and your qualified business income
3. Apply any limitations
This would include SSTB, high-income tax, wage, and capital, or any other limitations that may apply
4. Calculate the deduction
this is based on the lesser amount of your taxable income and QBI. After calculating the 20%, the minor amount will be applied to your income as the deduction
Sally is a married taxpayer who files jointly. She owns a bakery with a QBI of $150,000 and a taxable income of 250,000.
After claiming the standard deduction for 2023 which is 27,700, Sally's modified income becomes 222,300 (250,000 - 27,700).
Now she has to calculate the deduction to find the lesser amount
QBI: $150,000 x 20% = $30,000
TI: 222,300 x 20% =44,460
Since Sally's QBI amount is lesser ($30,000), it is subtracted from her overall income (222,300 - 30,000) which would make her new taxable income $192,300 after applying the QBI deduction.
Can I Still Claim This Deduction?
Eligible taxpayers can claim the deduction for tax years beginning after December 31, 2017, and ending on or before December 31, 2025. This means, unless the section is modified in the next two years, you are still eligible for this deduction for the next 2 upcoming tax seasons.
If you don't want to go through the process alone and don't have a tax provider, don't worry! STA got your back. We offer professional assistance to properly apply this deduction to your taxes and achieve the best possible results.
If you are a sole proprietor, partner business, s corporation, estate, REIT, or PTP, do not hesitate to apply this deduction to your taxes next season!
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