There’s a new deduction on the block, if you haven’t heard of it already. Another new item from the Tax Cuts & Jobs Act of 2017, the Qualified Business Income (QBI) Deduction allows certain businesses to claim a deduction of up to 20% of qualified business income. That deduction operates similarly to itemized deductions by reducing the income that will be used to calculate what you owe in taxes. As you may expect, there’s a lot to unpack in the calculation of that 20% QBI deduction.
Qualify for QBI
The QBI deduction is available to sole proprietorships, partners in a partnerhsip, or the shareholders in S corporations. Certain trusts and estates, such as Real Estate Investment Trusts (REITs), may also claim QBI. Corporations cannot claim QBI. Generally, QBI is geared towards individual taxpayers with small businesses formed as “pass-through” entities such as the aforementioned examples.
Specified service, trade or businesses (SSTBs) may be unable to claim QBI as well. See Form 8995 Instructions for a full list. Some businesses to note that do not qualify:
- Health
- Law
- Accounting
- Consulting
- Investing & investment management
However, if an SSTB is below certain income thresholds, they may qualify for QBI. More on those thresholds later.
Adding up for QBI
QBI is the net amount of qualified income, gains, deductions, and losses connected to the operations of a trade or business in the United States. To figure your QBI, you should consider all related expenses and income to your qualified business. However, certain items cannot be included in your QBI calculation such as:
- Interest income not related to the business.
- Non- Effectively Connected Income (ECI) with the USA.
- Amounts received as guaranteed payments (such as partners in a partnership)
- Capital gains or losses
- Dividends and dividend equivalents
QBI is a new tax frontier to grasp, so this is a good place to pause. Join us here at MiklosCPA for part 2 as we drill down further into the how QBI is calculated and where to report it.
MiklosCPA is a California based CPA firm that works with emerging businesses in various industries with their accounting and tax needs. Check out our social media pages for additional tax tidbits. Or if you’d like to learn more how we can help YOUR business, drop us a line.