Making Sense of the New Qualified Business Income Deduction
Monday, April 29th, 2019 
         One of the most impactful parts of the Tax Cuts and Jobs Act (TCJA) is the new Qualified Business Income (QBI) deduction. In this newsletter we will break down why the deduction was created, what kinds of businesses it applies to, and how it works in a basic sense so that you can better understand how to make use of it in your tax planning.
       Why was it created? 
  • The TCJA changed the way that C Corporations are taxed. Previously, they were subject to graduated tax rates (similar to individual tax brackets) at a rate of up to 35%. Beginning in 2018, the C corporation rate was dramatically reduced to a flat 21%. The QBI deduction was created to level the playing field so that C corporations were not significantly tax-advantaged compared to other types of businesses.

        What types of businesses does it apply to?

  • The QBI deduction applies to all types of businesses that are not C corporations. Specifically, it applies to the following:
    • Partnerships (Form 1065)
    • S Corporations (Form 1120S)
    • Sole Proprietorships and Single-member LLC's (Schedule C)
    • Rental Activities that are not Triple-net Lease Arrangements (Schedule E)
    • Farming Businesses (Schedule F)

         How does it work?

  • QBI is essentially the net income of the business, not including capital gains, dividends, or investment interest. Although QBI is calculated at the entity level, the actual QBI deduction is calculated at the individual level as a deduction from taxable income.
  • For the 2019 tax year (filed in March/April 2020), if your taxable income is less than $321,400 for married filing jointly or $160,700 for single or head of household status, the calculation of the QBI deduction is simple: take 20% of QBI from each business and subtract it as a deduction from taxable income.
  • If your taxable income is more than the above figures, your QBI deduction could be phased out based on the type of business you have, the amount of property your business owns, and/or the amount of wages you pay to your employees.
    • Specified Service Trade or Business (SSTB) Limitation: If your business is involved in a SSTB, your deduction will be completely phased out after your taxable income reaches $421,400 for married filing jointly tax status and $210,700 for single or head of household filing status. SSTB's include services involved in the following: health, law, consulting, athletics, financial services, brokerage services, and investing. 
    • Wage Limitation: In addition to the SSTB limitation, another limitation is applied if you are above the $321,400/$160,700 taxable income thresholds based on how much your business pays in W-2 wages. The deduction is limited to the greater of:
      • 50% of W-2 wages paid or,
      • 25% of W-2 wages paid plus 2.5% of the cost of certain business assets

         In sum, if your taxable income is below the phase-out threshold for your filing status, you will probably receive a deduction for your QBI activities. If you are above the phase-out thresholds and your business is not a SSTB, there may be some planning points for you to take in order to maximize the effect of the deduction.

Employee Spotlight - Desiree Amaro Mori

Des has been a member of the Soukup, Bush & Associates team since August of 2018 and is the firm's Chief Operating Officer. Prior to joining the firm, she held positions in the private business sector for over 6 years. Des received her B.S. in Business Administration, Accounting, along with her Master of Accountancy Degree, with a specialization in taxation from Colorado State University.

In her spare time, Des enjoys traveling, hiking, skiing, and spending time with her husband, Will, and their rescue pup, Max. She also loves exploring Colorado and all Fort Collins has to offer.

If you have questions about how the QBI deduction might affect your tax situation, please contact us at (970) 223-2727.