We’re all new to the TCJA (Tax Cuts and Jobs Act), so I’m sure you have questions. Here’s an easy Q&A to help you understand the basics of what the QBI deduction is and how it will affect you.
The QBI Deduction (Qualified Business Income), is a deduction for pass-through entities (everything other than C-Corps) to claim an extra 20% on qualified income off of their tax liability. This can save thousands for certain industry and business types!
Q: What is Qualified income?
A: Qualified Business income is the net of any qualified trade or business’s items of income, deductions, losses, etc… Certain income does not qualify such as dividends, interest and capital gains.
Q: Who Gets the Credit?
A: The credit is granted at the individual level. For Sole Proprietors and Single Member LLC’s you file your business income directly on your personal return and the QBI deduction is applied there. For Partnerships and S-Coprs the QBI deduction is calculated at the Partner’s level on their personal return.
Q: What happens if I have a loss this year?
Essentially, you don’t get the credit. With most losses you carry them forward to the next tax year. As you carry this forward this will offset your income and the net amount is what you will receive the QBI deduction on.
Q: What if my company pays me as an employee?
A: Here’s where it gets complicated (I’ll try to explain as simply as possible). If you receive W2 wages from your company the taxpayer is allowed to include in the combined QBI amount the lesser of (a) 20% of the QBI with respect to the qualified trade or business or (b) the greater of the following:
- 50% of the W-2 wages with respect to the qualified trade or business, or
- 25% of the W-2 wages with respect to the qualified trade or business plus 2.5% of the unadjusted basis immediately after acquisition of all qualified property with respect to the qualified trade or business (the preliminary QBI deduction amount).
There are more specifics relating to this, so if you’re at this stage feel free to contact us!
Q: Are there specific industries that don’t qualify?
A: Unfortunately yes. The IRS says: “any trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of the owners or employees.”
There are also more specific examples of trades or professions that don’t count. For example, a personal trainer can work in the field of health but still considered a Qualified Business for the deduction.
There are many other rules and limitations to claiming the QBI deduction and the law is always changing. Please feel free to contact us any questions you may have or for your tax preparation needs!