What You Need to Know About the Qualified Business Income Deduction

 Posted on June 14, 2019 in Taxation Law

The qualified business income (QBI) deduction was created by Section 199A of the Tax Cuts and Jobs Act of 2017 and since then, the IRS has issued additional rules and guidelines on how taxpayers can take this deduction. Because it could significantly reduce a person’s tax burden, qualifying taxpayers should understand how this deduction operates and the limitations of the deduction.

Details of the QBI Deduction

A Section 199A QBI deduction can be taken by owners of pass-through entities engaged in qualified businesses. Such taxpayers can claim up to a 20 percent deduction on all qualified business income.

The regulations define a pass-through entity as partnerships or S-corporations that are directly or indirectly owned by one or more individuals, estates, or trusts. Some estates and trusts may also be considered pass-through entities that are eligible to take the deduction.

Under the regulations concerning the 199A QBI deduction, the business owner's taxable income for the year is important. If the taxpayer’s income is more than $157,500 (or $315,000 for married couples filing jointly), the process of calculating the deduction becomes much more complicated. In either case, you should consult a qualified tax professional.

The newly issued rules also seek to address potential abuse. For example, the rules prohibit separating QBI activities from non-QBI activities.

How Will This Deduction Affect My Tax Liability?

With the new QBI deduction, the effective tax rate for a taxpayer could decrease from 37 percent to as low as 29.6 percent. This is a tremendous tax saving for many businesses, and affected businesses may choose to alter business plans or otherwise prepare for this change. For planning purposes, it is important to note that the deduction expires in 2026.

Call a San Jose, CA Tax Law Attorney

The Tax Cuts and Jobs Act provided a huge overhaul to our country’s tax laws, which left many taxpayers wondering how these new laws will affect them. The QBI deduction can be a powerful tool for your business, and you may be wondering if you qualify for this deduction and how it will change your taxes.

Our trusted San Jose business tax lawyer can answer any questions you may have concerning this deduction. We work with businesses just like yours to make sure they comply with IRS laws and are using every provision to their benefit. Call our office today at 408-866-1810 to arrange for your first meeting with our firm.

Sources:

https://www.forbes.com/sites/anthonynitti/2019/01/19/irs-publishes-final-guidance-on-the-20-pass-through-deduction-putting-it-all-together/#223158d7d9f0

https://www.accountingtoday.com/opinion/investors-and-business-owners-may-benefit-from-199as-20-qualified-business-income-deduction