OPPORTUNITIES
a n d L I M I TAT I O N S
Getting To Know The Qualified
Business Income Deduction
Corporate tax rates were reduced from
a maximum rate of 35 percent to a 21
percent flat rate under the Tax Cuts and
Jobs Act (TCJA). So, in order to keep
pace with the new corporate rate, the
qualified business income deduction
(QBID) was created to provide savings
opportunities for flow-through entities
and sole proprietors. This valuable
deduction allows some business owners
to take a 20 percent deduction of
qualified business income (QBI) earned
in a qualified trade or business, which
would lower the maximum individual
rate from 37 percent to 29.6 percent for
a pass-through owner. However, as you
can imagine, certain limitations apply.
Digging Into The Deduction
Unlike the across-the-board cuts given
to C corps, the rules associated with the
QBID are rather complex.
Generally speaking, your QBID will be 20
percent of QBI (income, gain, deduction
and loss with respect to the qualified
trade or business) from an S corp, LLC,
partnership, sole proprietorship, trust or
estate at the owner level. Compensation
and guaranteed payments, on the other
hand, aren’t considered QBI; instead,
they would reduce your QBI received
from flow-through entities.
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Certain businesses will struggle to take
advantage of the QBID. This includes
non-service businesses that rely on the
efforts of their owners, and companies
with limited employee or capital invest-
ments. Businesses classified as specified
service trades or businesses (SSTBs), in-
cluding those in the areas of health, law,
accounting, actuarial science, perform-
ing arts, consulting, athletics, financial
services, brokerage services and invest-
ment management, will also struggle.
If your business doesn’t employ a
substantial number of people relative to
its size or invest in a considerable amount
of property, the W-2 wage limit and
unadjusted basis of property will likely
minimize the deduction. For example:
• If your taxable income is below
$315,000, then no limitation applies
and the deduction will generally be 20
percent of QBI, regardless of whether
your business is a qualified trade or
business, or an SSTB.
• However, if your taxable income is
between $315,000 and $415,000, the
allowable deduction is phased in. W-2
wages and qualified property amounts
will help determine the deduction.
By Dana Lee, CPA,
senior manager,
[email protected]
(Marietta office)
• If your business is an SSTB and
your taxable income is more than
$415,000, unfortunately, no deduction
is allowed.
• If your business isn’t an SSTB and
your taxable income is more than
$415,000, the deduction will be deter-
mined based on QBI, W-2 wages and
qualified property.
Under the IRS’s final guidance, some
business owners and entities may be
able to aggregate multiple businesses to
calculate the deduction as long as cer-
tain conditions are met. This would allow
you to treat the aggregated businesses
as a single activity when applying W-2
wages and qualified property limitations.
Just remember that the total deduction
amount cannot exceed your taxable in-
come (minus the net capital gain/quali-
fied dividends) for the tax year.
While the QBID might sound like a great
way to reduce your tax liability, make
sure you have the proper assistance be-
fore moving forward. It’s best to discuss
this strategy with your advisor, who will
help you determine your eligibility and
offer strategies to optimize the availabil-
ity of the pass-through deduction. Email
me to learn more.