If you actively participate in owning and operating a business don’t miss out on 2018’s Qualified Business Income Deduction. It’s on line 9 of your 1040 of your personal tax return and it might be the largest or second largest deduction you’ll take this tax season. It came from the new changes to the tax code called Tax Cuts and Jobs Act. If you qualify for the QBI deduction 20% of the qualifying business income that you make is tax free.
This is a big deal and an important deduction, however, calculating what exactly is Qualified Business Income it is not that straight forward. Qualified Business Income is actually not equal to 20% of your business profit, but in some cases it can come close to that. Your tax program (or your tax preparer) should be able to make the Qualified Business Income calculation for you.
Considering the QBI deduction for a single taxpayer that actively participates in thier business, files a schedule C, and has $100,000 profit ,only about 16.2%* of the individual’s business profit was tax free. With an effective tax rate of 25% the person would receive a tax break of about $4,000. That’s a big deal. Note this scenario is relatively a simple exploration of the QBI calculation and there could be details about your tax situation that would change this calculation or eliminate the QBI deduction altogether. Be sure to talk to a tax expert if you’re unsure about your specific tax situation. (See the QBI calculation for this scenario at the bottom of this page)*
There are additional stipulations for this deduction. Generally, you have to actively participate in your business, it does not apply to passive income (but do note, there are exceptions to this). If you would like more info on passive income and how it relates to your tax liability follow the link below:
In most cases there are limits the amount of business income a person can make and still take this deduction. If you’re single the QBI deduction starts to phase out if you have an income of more than $157,500 and if you’re married filing joint your QBI deduction starts to phase out if your income is above $315,000. Make a note, some business types don’t have these income limits for QBI, and as you can imagine, it gets a little more complex for different business structures such as an S-Corp or partnerships. You can learn even more about all of these details from the IRS using the link below:
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*QBI calculation from scenario discussed above:
Start with Business Profit of $100,000
Less: The Self Employment Tax Deduction: $7,065
Less: Your Standard Deduction: $12,000 (Single Filer)
Equals: Qualified Business Income: $80,935
Multiply QBI by 20%: $16,187
QBI Tax Deduction: $16,187
Business Profit divided by QBI Deduction: 100,000/16,187
Percentage of business profit that is tax free 16.2%