One of the changes of the Tax Cuts and Jobs Act (TCJA) is the creation of the Qualified Business Deduction (QBI).
This post will give you a general idea on how to calculate for yourself, but if you want to know more, you can start here on the IRS website.
If you have a small business, need a Schedule C or E on your return, you probably are entitled to take a deduction on line 10 of page 1 on your Form 1040. The deduction is for tax years starting 2018 through 2025.
In most cases, the deduction is 20% of a taxpayers QBI from a sole proprietorship or single-member LLC (Schedule C) or partnership and S-Corporation (Schedule E.)
What is QBI?
Qualified Business Income is the net amount of income, gains, losses and deductions relating to the qualified business of the taxpayer. Compensation to the owners/partners or guaranteed payments are excluded from QBI. Investment capital gains, losses, dividends and most interest are also excluded from the QBI calculation.
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Who is Entitled to QBI Deduction?
An individual with a trade or business (with exceptions), trust or estate and certain other organizations that are not in the scope of this post.
Exceptions:
- Trade of being an employee. If you are a freelance that derives a large portion of your income from one client, you may be considered an employee of that client instead of an independent contractor. You can research on the IRS site here.
- The deduction is limited for those in a Specified Service Trade or Business (SSTB.) The deduction starts to phase-out if the taxpayer’s taxable income exceeds $163,300 ($213,300 completely phased-out) for Single filers or $326,600 ($426,600 completely phased-out) for those filing Married Filing Joint.
- Taxpayers that taxable income from W-2 wages exceed the threshold amounts above.
Specified Service Trade or Businesses Subject to Limitations of QBI Deduction
The taxable income limitations apply to the following types of service businesses:
- Accounting 🙁
- Law
- Healthcare
- Actuarial
- Consultants
- Financial Services
- Brokerage Services
- Athletes
- Performance Artists
- Any other trade or business relying on the skill of one or more employee
Where is the QBI Deduction Reported
Whether filing a Schedule C, Schedule E (from a 1120S or 1065) the deduction is taken at the taxpayer level (passed through to the individual.) For 2020, the deduction is reported on Line 13 of page 1 of Form 1040.
This will treat the QBI deduction like itemized or standard deductions, after AGI calculations but before arriving at taxable income.
Example
This will be a quick example. Let’s say I am a Single CPA with a small firm that netted after expenses $75,000 and I had paid myself wages of $50,000 throughout the year. The QBI deduction will be 20% of the $75K, $15,000.
The business will pay a portion of FICA and withhold a portion for the $50,000 in wages (assuming the business deducted their portion in this example to arrive at the $75,000 net profit.) As a taxpayer, my FICA and effective tax rate will be withheld from my wages and I will be responsible for the employee and employer portion of FICA (15.3%) on the $75,000 profit. The self-employment taxes will be reported on the new Schedule 1 and Schedule 4.
YouTube video explaining the QBI deduction:
I hope this helps clear up the new Qualified Business Income (QBI) Deduction. If you need help preparing your taxes, you can email me at ValdostaCPA at Yahoo.com or find me through Fiverr. I am a licensed Georgia CPA.
