Do I Qualify for the Qualified Business Income (QBI) Deduction?
A new deduction introduced by the Tax Cuts and Job
s Act of 2017 is the Qualified Business Income (QBI) Deduction, one of the biggest changes for pass-through entities under tax reform. This is a new deduction for owners of partnerships, LLCs, S-Corporations and sole proprietorships. It is intended to correlate to the reduced tax rate that corporations now enjoy. However, this new deduction is calculated at the individual level, not the entity level.
If your joint taxable income is under $315,000, you can take the full QBI deduction. If your joint taxable income is over $415,000, your deduction depends upon the wages paid by your business or the assets owned by the business. If you fall between the $315,000 and $415,000, the deduction is between the full amount and the limited amount based upon wages and/or assets.
Notice that the trigger is taxable income. This means the amount after you deduct your pension and profit sharing contributions, half of your self-employment tax, self-employed medical insurance, and your deductions, whether they be itemized or the standard amount. Of course, when final guidance and regulations come out, any of t
hese details could be changed.
Specified Service Industries
Some industries are excluded based upon what they do. These are called specified service businesses.
- Financial services
- Athletics and performing arts
- Any business where principal asset is reputation of skill of one or more of its employees or owners
Owners of these types of businesses may still take the full QBI deduction if their taxable income is below the lower threshold ($315,000 for joint filers), but they get no deduction at all if their taxable income is above the upper threshold ($415,000 for joint filers), regardless of the wages paid or the assets owned. The deduction is phased out ratably if taxable income is between the lower and upper thresholds.
QBI Deduction Flowchart [Infographic]