Year-end Planning Tip for Qualified Business Income (QBI) Deduction

If you own a business, you may wonder if you’re eligible to take the qualified business income (QBI) deduction. Sometimes this is referred to as the pass-through deduction or the Section 199A deduction.

The QBI Deduction:

• Is available to owners of sole proprietorships, single member limited liability companies (LLCs), partnerships, and S corporations, as well as trusts and estates.
• Is intended to reduce the tax rate on QBI to a rate that’s closer to the corporate tax rate.
• Is taken “below the line.” In other words, it reduces your taxable income but not your adjusted gross income.
• Is available regardless of whether you itemize deductions or take the standard deduction.

Taxpayers other than corporations may be entitled to a deduction of up to 20% of their QBI. For 2020, if taxable income exceeds $163,300 for single taxpayers, or $326,600 for a married couple filing jointly, the QBI deduction may be limited based on different scenarios. These include whether the taxpayer is engaged in a service-type of trade or business (such as law, accounting, health, or consulting), the amount of W-2 wages paid by the trade or business, and/or the unadjusted basis of qualified property (such as machinery and equipment) held by the trade or business.

The limitations are phased in. For example, the phase-in for 2020 applies to single filers with taxable income between $163,300 and $213,300 and joint filers with taxable income between $326,600 and $426,600.

For tax years beginning in 2021, under the new Biden Administration, the Qualified Business Income rules created by the TCJA could be completely phased out for taxpayers with taxable income over $400,000. It is unknown at this time whether President-elect Biden will be working with a split Congress – a Democrat-controlled House and Republican-controlled Senate.

Regardless of which party is in control, the partisan split in the Senate will be close enough that any proposed changes to tax policy will have to be negotiated and wrapped in compromise in order to survive the legislative process and be signed into law.  We will keep you informed as to the progress of any tax proposals the new administration pursues.

Year-end Planning Tip

Should the proposal to phase out the QBI deduction become law in 2021, 2020 may be the last year some taxpayers will qualify for the QBI deduction. The deduction provides significant tax savings and it is important to be proactive and plan appropriately before year end.

There are several strategies that can be implemented to make the most of this valuable deduction. We are available to help you work through the best solution for you.

To learn more about the QBI Deduction, please click here.

DISCLAIMER: The WM Daily Update COVID-19, COVID-19 Business Resources and COVID-19 Client News Alerts and other related communications are intended to provide general information on legislative COVID-19 relief measures as of the date of this communication and may reference information from reputable sources. Although our firm has made every reasonable effort to ensure that the information provided is accurate, we make no warranties, expressed or implied, on the information provided. As legislative efforts are still ongoing, we expect that there may be additional guidance and clarification from regulators that may modify some of the provisions in this communication. Some of those modifications may be significant. As such, be aware that this is not a comprehensive analysis of the subject matter covered and is not intended to provide specific recommendations to you or your business with respect to the matters addressed.