Understanding the Qualified Business Income (QBI) Deduction (Section 199A)

Staying ahead in today’s competitive business world is especially important for small business owners. With ongoing economic uncertainty, it’s essential to save resources and stay flexible. Keeping your tax planning up to date throughout the year can help you avoid surprises at tax time. Using the Qualified Business Income (QBI) Deduction is one way to do this.

What is QBI?

The Qualified Business Income (QBI) Deduction is a federal tax break that allows eligible business owners to deduct up to 20% of their QBI, subject to certain limits. It was created by the Tax Cuts and Jobs Act (TCJA), and the OBBBA made it a permanent benefit.

This deduction is available to noncorporate taxpayers, including individuals, trusts, and estates. It generally applies to income from sole proprietorships, partnerships, S corporations, and other pass-through businesses.

Benefits of Using the QBI Deduction

Using this deduction gives you a chance to plan ahead and offers several benefits, such as:

• Lowering federal taxable income
• Reducing the amount of tax owed
• Conserving cash flow
• Thoughtful and organized year-end planning
• Helping structure records, wages, assets, and business activities

Example

If you have $100,000 in qualified income, you can deduct 20% and only pay tax on $80,000. For pass-through businesses, QBI is usually reported on a K-1 instead of a W-2. The more salary you take, the less QBI you have. Sometimes, it makes sense to take a lower salary to reduce self-employment tax and increase your QBI.

The QBI deduction can make a big difference for both your personal taxes and your business. It’s important to talk with a tax professional when using the QBI deduction.

Below are some items to review or prepare with your tax advisor when it comes to QBI:

• Identify separate trades or businesses, if applicable.
• Track QBI and non-QBI items separately.
• Gather W-2 and UBIA (Unadjusted Basis Immediately After Acquisition) info.
• Determine whether the business is an SSTB (Specified Service Trade or Business).
• Monitor taxable income before the year-end.
• Make sure applicable Schedule K-1 reporting is complete.
• If applicable, evaluate the aggregation where there are multiple businesses.

This deduction is more than just a tax break. It’s a chance to help your business grow and stay profitable. Planning lets you stay organized and make better decisions rather than rushing at the end of the year. The goal is to boost your profits and reduce uncertainty. Talk to your tax professional so you don’t miss out on savings, especially with the QBI deduction.

If you have questions about QBI or want to talk about how it affects you and your business, please call 215.675.8364 or email us to speak with a CPA today.

DISCLAIMER: All communications by Wouch, Maloney & Co., LLP intend to provide general information, as of the date of the 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. Please 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.