Do you own a business organized as an LLC, sole proprietorship, partnership, S corporation, or any structure other than a C corporation? If so, you may be able to claim a tax deduction of up to 20% of the business’s income.
The 2017 tax law known as the Tax Cuts and Jobs Act included a new deduction for owners of pass-through businesses, effective for tax years 2018 through 2025. The deduction goes by several names: 199A deduction, 20% pass-through deduction, and qualified business income (QBI) deduction.
The QBI deduction is equal to 20% of your share of qualified business income, subject to certain limits. For example, if your share of QBI is $100,000, you may be able to claim a deduction of up to $20,000 on your Form 1040.
Qualified business income includes domestic business taxable income from any qualified trade or business that is not structured as a C corporation. LLCs, sole proprietorships (think 1040 Schedule C), partnerships, S corporations, and trusts are eligible entities.
Qualified business income is generally the operating taxable income (not revenue) of the business. It does not include investment income such as dividends, interest, capital gains, and similar items. It also does not include W-2 wages received by S corporation shareholders or guaranteed payments received by partners or LLC members.
The amount of your QBI deduction depends not only on business income, but also on your overall personal taxable income and capital gains.
If your 2019 personal taxable income is below $321,400 married filing jointly ($160,700 single), your QBI deduction is subject to only one limitation. If the QBI deduction is less than 20% of personal taxable income minus capital gains, you may take it in full.
If your 2019 personal taxable income is above $421,400 married filing jointly ($210,700 single), you are subject to several limitations. First, income from a specified service trade or business does not qualify for the deduction. Specified trades and businesses include services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, investing and investment management, trading, dealing in securities (including partnership interests or commodities), and any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners. Second, your QBI deduction is limited to the greater of 50% of your share of W-2 wages from the business, or 25% of W-2 wages plus 2.5% of business property. Third, the deduction is limited to 20% of your personal taxable income minus capital gains.
If your 2019 personal taxable income is between $321,400-$421,400 married filing jointly ($160,700-$210,700 single), the specified service business and wage & property limits discussed above are phased-in. Your deduction will be partially allowed, subject to the 20% of taxable income minus capital gains limit.
If you think you might qualify for the qualified business income deduction, please contact your L&B professional at 858-558-9200 to discuss.