The qualified business income (QBI) deduction is a tax break that’s been given to certain business owners and self-employed workers since 2018. In addition, the amount of income earned from the business or other sources can affect the QBI deduction. The income threshold started in 2018 at $315,000 for a married couple filing jointly and $157,500 for single individuals, married people filing separately and heads of households. For 2020, the thresholds are $326,600 for married individuals filing joint returns and $163,300 for other filers.
Congress’s use of the term “qualified trade or business” for purposes of Sec. 199A could prove problematic. While a “trade or business” is not defined in the Code or regulations, the most established use of the term is in Sec. 162, which permits a deduction for all the ordinary and necessary expenses paid or incurred in carrying on a trade or business. The first prohibition prevents an employee from claiming a 20% deduction against his or her wage income. This article examines the various computational and definitional elements of claiming the Sec. 199A deduction. It then discusses the primary areas of concern and confusion among tax advisers, highlighting areas where additional guidance is most desperately needed, as well as planning opportunities in the absence of such guidance. The details about applying the QBI deduction to your situation aren’t easy to grasp.
How To Get the Qualified Business Income Deduction (QBI)
Taxpayers whose taxable income exceeds the threshold amount of $157,500 ($315,000 in the case of a joint return) are subject to limitations based on the W-2 wages and the adjusted basis in acquired qualified property. For service related businesses, there is a separate phase-out if taxable income exceeds the threshold amount. The results reflected in Examples 17 through 19 are problematic; similarly situated taxpayers should generally enjoy similar federal income tax consequences. But by virtue of two pieces of Sec. 199A — the inclusion of wages paid to an owner in the W-2 limitation and the exclusion from qualified business income of reasonable compensation and guaranteed payments paid to an owner — inequities arise at all income levels.
Some have speculated that this provision seeks to expand the reasonable-compensation requirement beyond shareholders in an S corporation, requiring sole proprietors and partners in a partnership to treat a portion of their business income as reasonable compensation. This would reduce the qualified business income eligible for the Sec. 199A deduction, putting them on equal footing with a shareholder in an S corporation. With tax reform, pass-through income is receiving increased attention. A pass-through entity is a business entity that passes through its income to the owners of the business. The owners then report the business income on their personal returns.
How is the QBI deduction calculated?
In applying the formula discussed earlier, each item in the formula — QBI, W-2 wages, UBIA — is phased out. If taxable income is high enough, there’s a full phase-out so that no QBI deduction can be claimed. If you are in an SSTB but your taxable income is below the limit discussed earlier, you get the full QBI deduction like any other business owner. The unadjusted basis of qualified property (UBIA) is the basis of tangible property, such as equipment and machinery, without regard to depreciation or other write-offs.
- To claim the QBI deduction, the business must operate as a pass-through entity, have QBI, and survive the numerical calculations.
- A pass-through entity is a business entity that passes through its income to the owners of the business.
- Without specific and detailed guidance, this issue will lead to countless disputes between taxpayers and the IRS.
- As a result, the chain restaurant should not fall victim to the catch-all.
- The field of accounting does not include payment processing or billing analysis.
- Jerry’s share of the company’s QBI is $150,000, which would entitle him to a QBI deduction of $30,000 (20% of $150,000).
The creation of the QBI deduction was seen as a way to balance the 2017 law’s reduction of the C corporation tax rate from as high as 35% down to 21%. For QBI reported on a K-1, Lacerte assumes the entity issuing what is a qualified business income deduction the K-1 has already reduced the QBI appropriately. If you feel QBI was misrepresented on your K-1, you can check the box Reduce QBI by self-employed health insurance deduction to reduce QBI as needed.
How Does the Qualified Business Income Deduction Work?
Once you’ve completed the steps in each of the relevant schedules for your client’s return, you’re done. The program will automatically generate Form 8995 or https://www.bookstime.com/ Form 8995-A based on what’s required for your client’s return. The QBI deduction will flow to line 10 of Form 1040 or 1040-SR, or line 38 of Form 1040-NR.
