Podcast: Qualified Business Income

Qualified Business Income

Written by Jeff Dvorachek

June 2, 2022

Back in 2018 the corporation tax rate was decreased from 35% down to 21%. At this same time the Qualified Business Deduction or QBI was introduced. This tax deduction was meant to even the playing field between corporations who pay their own tax and businesses that pass their income to the shareholders or partners.

WHAT TYPE OF BUSINESSES ARE ELIGIBLE FOR THE Qualified Business Income DEDUCTION?

  • As I mentioned earlier, this deduction is available for any entity that passes its income to a shareholder or partner such as a partnership or s-corporation.
    But it is also available for sole proprietors and single-member LLCs where the net income is reported directly on the individual’s return. This could be a business, farm or in some cases a rental.

HOW MUCH IS THE DEDUCTION?

  • The QBI deduction is worth 20%.
    So for example, let’s say a business has $100,000 of income before the deduction. The deduction is worth $20,000, so the owner of the business only pays tax on $80,000. That $20,000 deduction could save almost $5,000 if the taxpayer is in the 24% tax bracket, so we are talking real tax savings.

DOES ANY BUSINESS INCOME QUALIFY?

  • As long as a business operates as an active business (for the most part), your income will qualify.
    If you operate a hobby or in some cases a passive business, that income will not qualify.

CAN ANY BUSINESS OWNER TAKE ADVANTAGE OF THIS DEDUCTION?

  • Yes, as long as their total income is under the taxable income limits of $315K for MFJ or $157,500 for single.
    These limits include all their income – both business and other income.
    If your income is higher than that, it gets more complicated and you want to talk to your accountant to make sure you are maximizing the deduction.

YOU SAID EARLIER THAT A PASSIVE ACTIVITY MAY NOT QUALIFY. ARE THERE ANY THAT MIGHT QUALIFY?

  • If you have a rental property, it gets complicated to determine if they qualify.
    If the rental income is directly related to an operating business owned by the taxpayer, then it will generally qualify unless the operating business is a C-corporation.
    Also if you own a number of buildings that are rented, they may not qualify individually, but an owner can group them and then they may qualify.
    This is another area where you want to talk to you accountant.

Be sure to talk to a tax professional if you have any questions about the Qualified Business Income.

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Jeff Dvorachek
I joined Hawkins Ash CPAs in 1998. I am the partner-in-charge of the Manitowoc, WI, office and tax director for the firm. I have thorough experience providing tax services to individuals, commercial businesses, nonprofit entities and estates and trusts. I also provide compilation and review services. I lead the Tax Committee and am a member of the Information Technology Advisory Committee.

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