Qualified Business Income (Tax) Deduction (1 of 3)
Hey small business owners, today I’m going to be talking about, perhaps the most relevant topic following the Tax Cuts and Jobs Act of 2017, and that’s the Qualified Business Income Deduction (QBID) or as it’s sometimes referred to, the “20-percent pass-thru deduction”. At the high-level this deduction allows you to reduce your qualified business income by 20-percent before calculating tax, but as with everything related to tax there’s a lot of nuance. The biggest factors that are considered are your taxable income, at the individual level and what activities your business is engaged in. So let’s get into it!
What is Qualified Business Income?
In order to qualify for a Qualified Business Income Deduction, one must have Qualified Business Income.
Qualified Business Income, is basically just the net taxable income of your pass-through business, taking into account items of income and gain, reduced by deductions and loss. This income can come to you on your Schedule C, sole-prop, potentially Schedule E, your rental income, your S Corp K-1, or your Partnership K-1.
Keep in mind, income as an employee does not count as Qualified Business Income, even if your W-2 is coming from the same business that your qualifying K-1 is coming from.
Specified-Service Trades or Business (SSTB) are also excluded, though at lower income levels SSTBs may also qualify. I’ll be defining SSTB a little more in part 3, but if you’re an accountant, attorney, doctor, consultant, athlete, and the like, that means you.
For individuals whose taxable income is under defined thresholds, the deduction is straightforward in that your pass-through income will qualify for the full deduction, irrespective of other quantitative criteria (which I’ll get into later).
For 2019, the lower threshold, if you’re
Single or Head (S/HH) of Household is taxable income $160,700
Married Filing Separate (MFS) with a taxable income of $160,725, and
Married Filing Joint (MFJ) with a taxable income of $321,400
Once you exceed the lower taxable income threshold, you have a phase-in of additional criteria you’ll have to follow in order to max out the deduction, and if you’re in a Specified-Service Trade or Business (SSTB), you begin to phase yourself out of the deduction completely.
If your taxable income (again this is at the individual-level) exceeds the upper income threshold and you are not in an SSTB, you can still qualify for the full deduction, but you have to pay W-2 wages and/or invest in qualifying business property (I’ll go into more detail in part 2).
If you happen to be in an SSTB and your taxable income is above the threshold, you don’t get the deduction, though there are some planning opportunities that we can employ in order to still get you the deduction (I’ll go into more detail in part 3).