Am I Eligible For A Qualified Business Income Deduction?

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Running a business can be lucrative, but also costly in today’s changing business landscape. Every business owner wants to take advantage of any legal and fair tax deductions, and one of these popular deductions is the Qualified Business Income Deduction (QBI Deduction). But what is this fairly new IRS deduction and can you take advantage?

What is the Qualified Business Income Deduction (QBI)?

Starting in 2017, the Qualified Business Income Deduction is for business income for people who have “pass-through income”, which is income that is reported through your business entity. This is for Sole Proprietorship type businesses, some Partnerships, S Corporations, and Limited Liability Companies (LLCs).

Who Can Take Advantage of the QBI Deduction?

Anyone who has a qualified business entity that generates pass-through income, such as an S Corporation, LLC, or other entity, may be eligible. After meeting this standard, there is an income standard to meet as well. In 2022, the limit is $170,050 for single filers and for joint or married filers this rises to $340,100. Ove these limits? Then there are complex IRS rules to determine if there can be a full or partial deduction. At this point, it is imperative to hire a professional to help navigate these rules.

What are the QBI Deduction 2022 Rules?

First, we have to define qualified business income, which the IRS defines as “the net amount of qualified items of income, gain, deduction, and loss with respect to any trade or business” which in summary is the net profit for your business.

To qualify, your total taxable income, or your household income if married or filing jointly, must meet the income requirements stated above. If so, you may qualify for a 20% deduction on your taxable business income. However, even if you meet the income requirements some of the qualified business income deduction is phased out for some types of business. Above those limits, then it gets more complicated.

Some business types where the QBI is phased out include specific professions like health professions (doctors, dentists), law, accounting, consultants, performing arts (actors, stage staff), athletes, and other similar professions. If your business is a “specified service trade or business”, SSTB for short, then things can get complex quickly. At this point, you’ll want to speak with a tax professional in order to get the right advice to navigate all your deduction and credit options to ensure you are paying the right amount in taxes: no more and no less.

How to Calculate the QBI Deduction

There are a few steps even the average person can run through to get a rough calculation of their potential QBI deduction, but we strongly recommend working with a tax professional for advice specific to your situation.

The first step is to fill out your Schedule C and your Form 1040 to understand your taxable income, not your adjusted gross income (AGI). Your taxable income is your total income less your deductions and personal expenses. Using these forms, it can be easier to see what your total income is to first determine if you are qualified based on your income. 

Next, you want to calculate your qualified business income. This is the business’s net income less gain, deduction, loss. There are certain items that qualify and that do not qualify (like investment income or loss). Have more than one business? You can combine them to calculate your QBI, but the businesses must meet certain criteria.

Once you have your total qualified business income, up to 20% of this may be deductible. Your QBI deduction is limited to 20% of your QBI or based on a wage calculation of W-2 wages (which can get complicated). 

When to Get Help with My QBI Deduction and Business Taxes

Firstly, congrats on standing up a business! It is no easy feat to throw yourself out there and put in the hard work any business owner and entrepreneur does. It can be easy to trip up and get overwhelmed with finances, legal issues, and especially taxes.

We recommend seeking professional help with your business taxes, as there are often deductions and credits business owners may not be aware of or know about. Also, the threat of the IRS knocking at your door because taxes were not paid correctly only adds to the stress of owning your own business.

Here at The Retirement Planning Group, we not only support individuals in their financial journey, but many of our clients are also business owners. That is why we created our tax preparation service. Our service is available to both clients and non-financial planning clients. We aim to be the easiest financial planning group to work with on planet earth, and that means serving our clients and communities with the type of financial support they need. Contact us to schedule a free 10-minute guidance call to see if we can help with your tax preparation and QBI deduction questions today!