In tax planning, deductions come in two flavors.
First are your tax deferral strategies. This includes things like retirement contributions, like-kind exchanges, installment agreements, etcetera. These are considered tax deferral strategies because you get a deduction today, but some time in the future you’ll potentially have to pay taxes on that income.
Second are permanent tax deductions, where you get to write something off today and you NEVER have to pay taxes on that income. Whenever we can, we want to take advantage of permanent tax deductions. The qualified business income deduction is a permanent tax deduction and as of now is only available until the year 2025.
Qualified Business Income (Tax) Deduction (1 of 3)
“High Income”
As stated in part 1, high taxable income is about $321k for married couples filing joint and one hundred and sixty thousand dollars $160k for people filing by themselves.
If your income is above that threshold, that means that you’re at least in the 32% tax bracket, if not higher.
Let’s do a little math, if you have $100k of Qualified Business Income and the Qualified Business Income Deduction is 20%, that’s $20,000; multiple that by your marginal tax bracket of 32% and you have potential tax savings of $6,400! That’s a compelling reason to want to max out your Qualified Business Income Deduction!
As stated earlier, by the time you get to the upper taxable income limits, you will receive no deduction, unless you adhere to the W-2 and qualified business property limits.
Those upper limits are:
$210,700 for taxpayers filing Single (S) or Head of Household (HH),
$210,725 for taxpayers Married Filing Separate (MFS), and
$421,400 for taxpayers Married Filing Joint (MFJ)
Wage/Basis Limitation
If your income is above the aforementioned taxable income limits, your Qualified Business Income Deduction (QBID), cannot exceed the greater of:
50% of W-2 wages paid, OR
25% of W-2 wages paid plus the unadjusted basis of qualifying property
(I’m going to take a moment here to let that sink in a little)
Unadjusted basis of qualifying property generally means any piece of property, whether it be real estate or personal property, that you get to depreciate under the MACRS (please note there are exceptions that will disqualify certain property). “Unadjusted” refers to the original cost basis of that piece of property, as opposed to it’s adjusted basis, after depreciation. The property will typically qualify for at least ten years from its original placed in service date, though assets with longer than ten-year lives will qualify for their full depreciable life.
Again, if your taxable income is above, or projected to be above, the taxable income limits, it’s imperative you take a second look at your tax plan. With you being in the 32, 35, or 37% tax brackets, you’ll be leaving substantial money on the table, if you get this wrong.