Maximizing Your Tax Savings: Understanding the Qualified Business Income (QBI) Deduction
If you’re a business owner or self-employed individual, there’s a valuable tax break you may be eligible for the Qualified Business Income (QBI) deduction. This deduction was introduced under the Tax Cuts and Jobs Act of 2017. The QBI deduction allows eligible taxpayers to deduct up to 20% of their QBI. This effectively lowers taxable income and reduces your overall tax liability. Here’s what you need to know to maximize this opportunity.
What Is the Qualified Business Income (QBI) Deduction?
The QBI deduction is designed to provide tax relief for owners of certain businesses, including sole proprietors, partnerships, S-corporations, and some LLCs. This deduction can result in significant savings, particularly for small business owners. To understand if you qualify it is important to know how the deduction works.
QBI refers to the net income from your qualified trade or business in the United States, excluding certain types of income like capital gains, dividends, interest income, and some investment income. It is not available to C-corporations or businesses that fall under the category of specified service trades or businesses (SSTBs). An SSTB are businesses like law firms, accounting firms, and other personal service businesses.
Who Is Eligible for the QBI Deduction?
The QBI deduction is available to businesses structured as sole proprietorships, partnerships, S-corporations, and some LLCs. If you’re a C-corporation, unfortunately, you won’t be able to take advantage of this deduction. However, many other types of businesses are eligible.
Income Limits and Eligibility
The QBI deduction is available to taxpayers with taxable income below certain thresholds. For 2024, the income thresholds are:
- $204,100 for single filers
- $408,200 for married couples filing jointly
If your taxable income falls below these thresholds, you can generally take the full 20% deduction on your QBI. But if your income exceeds these limits, the deduction may be limited or phased out, particularly for those in specified service trades or businesses (SSTBs).
Specified Service Trades or Businesses (SSTBs)
The deduction faces stricter limitations if your business is considered a specified service trade or business (SSTB). SSTBs include industries like law, accounting, health, consulting, and others where the success of the business depends largely on the reputation or skill of the employees or owners. If your business is an SSTB, and your taxable income exceeds the threshold, you may not qualify for the QBI deduction at all.
How Is the QBI Deduction Calculated?
We calculate the deduction as 20% of your QBI, but it’s also subject to certain limitations based on your income level and the wages you pay to employees. If your income exceeds the threshold, we will limit the deduction by the greater of:
- 50% of the wages paid by the business, or
- 25% of the wages paid plus 2.5% of the cost of qualified property used in the business.
Why Does the QBI Deduction Matter?
The QBI deduction is an excellent opportunity for business owners to reduce their taxable income. Especially for small business owners, this deduction can help keep more of your hard-earned money in your pocket. For high-income earners, understanding the thresholds and limitations of the deduction is key to navigating the potential tax savings effectively.
Final Thoughts
While the Qualified Business Income deduction can be a great tax-saving tool, it’s important to know if you qualify. If your business is eligible, the QBI deduction can significantly reduce your taxable income and provide real tax savings. However, if your income is near or above the income thresholds, or if you operate a specified service trade or business, you may need to navigate more complex rules.
To ensure you’re maximizing the benefits of this deduction, it’s always a good idea to consult with a tax professional who can help you understand the intricacies of the QBI deduction and how it applies to your specific situation. With the right planning, you can keep more of your profits and ensure your business is on the path to financial success.
Let us help you take full advantage of tax-saving opportunities like the QBI deduction—reach out to us for guidance today!
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