The Qualified Business Income Deduction or QBID was one of the hallmarks of the Tax Cuts and Jobs Act of 2017. Taxpayers engaged in a qualified trade or business can get up to a 20% deduction off of their income.
Notice how I said, “up to 20%”, because this is by no means automatic. Given your business category, you may not get any deduction at all. This deduction is taken at the personal level rather than the business level and applies only to the following taxpayers:
1 – Sole Proprietors
2 – Partners of Partnerships
3 – Shareholders of S Corporations
4 – Members of LLC’s that are treated as Sole Props, Partnerships, or S Corps
5 – Some Rental activities reported on Schedule E
6 – Estates
7 – Trusts
8 – Certain Tiered Entities
QBID is only a deduction for income tax. It doesn’t reduce Payroll Taxes or Net Investment Income. It is allowable whether you itemize your 1040 or not.
The QBID cannot create a loss. If the entity in question is at a loss, you won’t receive a further QBID.
The following types of income are specifically excluded from the QBID…
1 – Wages
2 – Reasonable Compensation
3 – Guaranteed Payments
4 – Real Estate Investment Trust Dividends
5 – Publicly Traded Partnership Income
6 – Qualified Cooperative Dividends
7 – Investment Income is also excluded including the following:
a – Capital Gains and Losses – Long and Short Term
b – Dividends
c – Interest Income
d – Gains and Losses from commodity transactions and trading foreign currencies
e – Income from annuities
Taxable Income Limitations for QBID
The initial QBID for a qualified business is the lesser of
1 – 20% of the taxpayers Qualified Business Income with respect to each qualified business or
2 – The greater of:
a. 50% of the W-2 wages with respect to the qualified business or
b. The sum of 25% of the W-2 wages with respect to the qualified business plus 2.5% of the unadjusted basis immediately after acquisition of all Qualified Property (QP).
2024 Taxable Income Thresholds For QBID
The Threshold Phase-Out Ranges and OTI for 2024 are…
1 – Married Filing Joint $241,950 $83,900 $100,000
2 – Married Filing Separate $191,951 $383,901 $50,000
3 – Single/Head of Household $191,951 $383,901 $50,000
If your taxable income is below the threshold , then your Qualified Business Income Deduction is 20% of your Qualified Business Income. But the QBID is limited by Overall Taxable Income or OTI.
If your business has $100,000 in profit but the Overall Taxable Income on your return is only $80,000 due to other taxable losses, then you’ll only get a deduction of $16,000 or 20% of the $80,000 OTI. If you are below the threshold, then it doesn’t matter what type of enterprises the business is engaged in.
If your taxable income is between the lower and upper threshold, then you’re in what is referred to as the Phase-Out Range. Your QBID is reduced by an applicable percentage of the W-2/QP limit. This modification results in a reduced QBID.
There are planning opportunities here because the phase out goes in conjunction with your wages and a percentage of your qualifying property. This depends on many factors.
Remembering that your wages automatically cost you another 15.3% in Social Security and Medicare Costs, it may or may not be a good idea to increase your salary. In this instance, it might be a good idea to purchase some additional depreciable assets.
As mentioned before, we may need to do some planning.
If a taxpayer’s income is above the Upper Threshold and the business isn’t a Specified Service Business (I will define what a Specified Service Business is in another column), then the W-2/QP deduction applies fully without any phase out of the QBID.
Let’s be clear. This deduction is based upon Wages and Qualifying Property. If you have neither, then you won’t get a deduction. Maybe this is another instance where we should increase a salary or purchase some assets. Again, we may need to do some planning.
If a taxpayer’s income is above the Upper Threshold and the business is a Specified Service Business then you don’t get a deduction.
Let me leave you with this…
It’s Friday. After a few more hours of work, most of us will be able to enjoy a couple of days of rest. Here’s a news item that might bring a smile to your face as you go into the weekend.
Condoms are now a deductible expense on your 1040.
In prior years, condoms were only a deductible expense on a case-by-case basis. In order for them to be deductible, a taxpayer would need to prove that they were necessary in order to stop the spread of a sexually transmitted disease.
But now, there are no limitations. The deduction is subject to the normal limitations of Medical Expenses on your Schedule A. If you don’t itemize, the deduction isn’t available.
You can read all about it in the following IRS Notice.
https://www.irs.gov/pub/irs-drop/n-24-71.pdf
I’d just love to be in an audit when this one line item came up. Could you possibly imagine?
This is the seventh column in my series of getting my clients ready for their December Tax Planning Sessions. As always, if you have any questions, don’t hesitate to ask.
We’re all going to get through this. Let’s get through it together.
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Chris Amundson
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