What Is a Qualified Business Income Deduction?

 Posted on May 02,2019 in Business Law

On Jan. 1, 2018, Section 199A was inserted into the Internal Revenue Service tax code as part of the Tax Cuts and Jobs Act. As stated in the code, Sec. 199A says sole proprietors, business partnerships, S corporations, and many trusts and estates could be eligible for a qualified business income (QBI) deduction. This lets qualifying taxpayers deduct a maximum of 20 percent of their QBI, in addition to 20 percent of qualified publicly traded partnership (PTP) income and real estate investment trust (REIT) dividends.

When the new law was announced, uncertainty remained as to what kinds of businesses would qualify for the deduction and the scope of its limitations. In January of this year, the IRS issued Publication 535, in which Chapter 12 addresses the QBI deduction. 

Here are some of the key points that answered questions which had lingered since the introduction of Sec. 199A last year. For a full examination of how Sec. 199A affects your business and taxes, contact an experienced business law attorney. 

Who Can Claim a QBI Deduction?

While individuals, trusts, and estates can take the deduction, S corporations and partnerships must pass it to shareholders and partners on Schedule K-1 and report this deduction on Form 1040. Trades and businesses can qualify if the business owner is actively involved in the enterprise with the intention of earning a profit. Rental property owners qualify if certain requirements are met. 

How Do You Calculate the QBI Deduction?

You can use the simplified 1040 worksheet if your taxable income is no greater than $157,000 as an individual or $315,000 if filing with a spouse. Publication 535 worksheets are available for incomes over those thresholds.

What About Net Losses?

If your business takes a loss in a calendar year or a QBI loss from a previous year, you must offset these proportionately against net income from other businesses or trades. Net operating losses are figured without the QBI deduction being taken into account. You can take the deduction for alternative minimum tax purposes, and self-employment net earnings are not reduced by the deduction.

Contact a Kane County Business Law Attorney 

As with any tax-related issue that can substantially impact your business and bottom line, you want skilled legal advice from an experienced attorney who will protect you and your long-term financial interests. At Ariano Hardy Ritt Nyuli Richmond Lytle & Goettel, P.C., we help business owners maximize their investments and profitability, including through successful navigation of the tax code to ensure compliance and reduce the chances of an IRS audit. To learn how an adept Elgin business lawyer from AHR can help you today, call us at 847-695-2400 for a free consultation.

Sources:

https://www.irs.gov/newsroom/qualified-business-income-deduction

https://proconnect.intuit.com/taxprocenter/tax-law-and-news/irs-releases-publication-535-with-details-around-qualified-business-income/