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What is the qualified business income deduction?

On Behalf of | Jun 2, 2022 | Business Law

Pennsylvania businesses can use a boost in today’s variable market, especially when it comes from the Internal Revenue Service. Although there was some trepidation about how the current administration was planning to change tax law, it has largely left untouched one particularly valuable tax shelter for small and mid-size businesses.

The qualified business income deduction (QBI) has been a tax-reduction perk that became part of the 2017 tax law. Because many business owners and self-employed taxpayers report business income on their personal tax returns, the QBI reduces tax liability, especially when the economy heads south. Business owners throughout Northeastern Pennsylvania can always benefit from planning and compliance strategies that will serve their interests and the needs of their business.

Who is eligible for the QBI?

Under the current IRS rules, self-employed and small to mid-sized business owners can deduct as much as 20% of their qualified business income on their taxes. Eligible businesses include sole proprietorships, partnerships, S corporations and limited liability companies, and also include some trusts and estates.

This QBI deduction applies to the net profit of the business. What it does not include is:

  • Income on interest
  • Capital gains or losses
  • Dividends
  • Wage or guaranteed payments to partners or shareholders
  • Earned income outside the country

In 2021, eligible entities whose total taxable income was below $164,000 for single and $329,800 for joint filers were eligible for a 20% deduction. In 2022 those numbers go up to $170,050 for single and $340,100 for joint filers.

Businesses who are above the threshold can still take advantage of pass-through income in part, however, this depends on the nature of the business. As some QBI deductions phase out, it may not be possible to benefit from the full 20% QBI deduction.

How can I deduct?

Under current law, there are two components to the QBI deduction:

  • As much as 20% on pass-through income, depending on the business structure or the type of W-2 wages the business owner pays.
  • Up to 20% of dividends from a qualified real estate investment trust (REIT) or income from a qualified traded partnership (PTP), depending on the business.

The deduction is available on either a Schedule A or the standard form and is limited to either the lesser of the QBI plus the REIT/PTP part, or 20% of taxable income minus capital gains.