GREAT IDEAS FOR ENTREPRENEURS FROM THE THOUGHT LEADERS AT CASEY NEILON
The QBI deduction is generally equal to 20% of your “qualified business income” from a partnership, S corporation, or sole proprietorship.
QBI Rules To Consider
Of course, it is not as simple as this. Rules are in place to deter high-income taxpayers from attempting to convert wages or other compensation for personal services into income eligible for the deduction.
These rules involve “thresholds” – which are taxable income of over $157,500 for single filers and $315,000 for joint filers. If your income is at least $50,000 above the threshold for single filers and at least $100,000 above the threshold for joint filers, all of the net income from a specified service trade or business is excluded from QBI. This means that you are ineligible for the deduction if you have a business that is classified as a specified service trade or business.
For taxable incomes that are above the threshold, but below the additional $50,000 or $100,000 limits, the exclusion from QBI of income from specified service trades or businesses is phased out.
What This Means For Your Industry
So what is a specified service trade or business? These are trades or businesses involving the performance of services in the fields of health, law, consulting, athletics, financial or brokerage services, or where the principal asset is the reputation or skill of one or more employees or owners.
So spas and health clubs are in, medical services provided by high income physicians, nurses, dentists etc. are out. High income attorneys, accountants, actuaries, financial advisors, mortgage brokers, realtors, actors, musicians etc. are out, but promoters, broadcasters, engineers and architects are in.
In real terms, this means that if your taxable income is below the threshold, it doesn’t matter in what type of industry your trade or business operates. But if you are above the threshold, and your trade or business operates in one of the specified services, your deduction is limited. Expect to see much more about this in upcoming regulations.
Taxable Income Limitations
For taxpayers with taxable income more than the above thresholds, there is a limitation on the amount of the deduction that is based either on wages paid or wages paid plus a capital element.
Here’s how it works: If your taxable income is at least $207,500 ($415,000 for joint filers), your deduction for QBI cannot exceed the greater of:
- 50% of your allocable share of the W-2 wages paid with respect to the qualified trade or business, or
- The sum of 25% of such wages plus 2.5% of the unadjusted basis immediately after acquisition of tangible depreciable property used in the business (including real estate).
For taxable incomes that are between the threshold amounts and the $207,500/$415,000 amounts, a phase-in of the limitation applies.
Other limitations may apply in certain circumstances, e.g., for taxpayers with qualified cooperative dividends, qualified real estate investment trust (REIT) dividends, or income from publicly traded partnerships.
How Does This Effect Your Situation?
Obviously, the complexities surrounding this substantial new deduction can be formidable, especially if your taxable income exceeds the thresholds discussed above. The other thing to bear in mind is that new regulations will come down that will clarify, and possibly amend, how some of these laws are applied.
This is why we are counseling our clients to setup a consultation with us as soon as possible. Many of our clients have business interests in more than one entity. So the impact of the new laws may need to be sorted out for you across multiple entities, which could take some time but will likely be well worth the effort.
If you would like more details about any aspect of how the new law may affect you, please reach out to us to setup a conversation.
Nicola Neilon – CPA, SHAREHOLDER
I am a CPA and shareholder at Casey Neilon. In this role, I work with many small businesses and their owners. I love that this gives me the opportunity to go beyond just being a tax preparer or auditor. The long-term relationship that develops encompasses the roles of business advisor and trusted confidant. I have been serving clients in this capacity since 1997. My experiences have taught me that I am not Wonder Woman, nor do I have a crystal ball, but many people have no background in accounting and finance, and they need someone that they can trust to help them navigate a path to reach their goals.