What is the qualified business income (QBI) deduction?
The QBI deduction is for self-employed business owners and smaller business owners, and it allows them to deduct as much as 20 percent of their qualified business income when they file their taxes. There is a limit for both single and joint filers. If you are under that limit, then you might qualify for the QBI deduction. If you’re over the limit, you may still be eligible. IRS rules will determine whether or not you do. Also, some income may not qualify, but a CPA can help you determine what does and doesn’t.
How do you know if you qualify for the QBI deduction?
Here are a few things that you need to know about applying for the QBI deduction.
• Your business should have a “pass-through” income or income that you would report on a personal tax return. Eligible businesses include partnerships, S corporations, sole proprietorships, and limited liability companies (LLCs).
• Your business should have QBI. In broad terms, that means the net profit of your business. Some income may not qualify. This includes capital gains, capital losses, dividends, income earned outside of the United States, interest income, and payments made to partners and shareholders.
• There are income limits. For 2019 taxes, the limit is $160,700 for those filing single and $321,400 for those filing joint returns. For 2020, the thresholds for single filers are $163,300 and $326,600 for joint filers.
What if you are above the income limit?
If you are above the income limit, you still may be able to qualify for the deduction. It will mostly depend on the type of business you have. And if you do qualify, you may not be able to get the full 20 percent, but you may still be eligible for a deduction. If your business is a “specified service trade” such as an actor, consultant, doctor, financial planner, or lawyer and you make above then the income limit, then you probably won’t qualify for the deduction. However, there are still tests that the IRS will use to determine if you are, as well as business owners who don’t have a “specified service trade.” The amount you pay employees and the value of the property that the business owns can help determine eligibility for the deduction.
However, this can get very complicated so its best to let a CPA handle this for you rather than trying to do it yourself. For all your tax preparation questions and needs in the San Diego area, contact our office today.
