If you are the owner of a sole proprietorship, partnership, or S corporation, then you need to know all about the tax deductions that compliment qualified business income (QBI). The QBI deduction, aka section 199A deduction, was put into action through the reforms in the 2017 Tax Cuts and Jobs Act. This tax law makes non-corporate taxpayers eligible to deduct up to 20% on their qualified business income, qualified real estate investment trust dividend (REIT), and qualified publicly traded partnership (PTP) incomes.
A 20% tax deduction means a considerable saving on your returns and a reduction in tax liabilities. But what exactly is the Qualified Business Income, and how do you know if you are eligible for it?
Well, in this article, we will take you on a walk through the crucial 199A Section and understand how you can make the best out of it.
A peep into qualified business income deduction
The section 199A of the 2017 Tax Cuts and Jobs Act provides a deduction on tax returns to a qualified sole proprietorship, partnership, S corporation, and, some trusts and estates. The deduction encompasses two elements: –
Qualified Business Income Component
This element of the deduction accounts for 20% of qualified business income earned by you from the business, as mentioned earlier. The QBI will depend on your taxable income with the emphasis on the following factors: –
- Type of trade or business
- Amount of W-2 wages paid
- The adjusted basis on the acquisition of a qualified property
A point to keep in mind is that your QBI can be reduced by the patron reduction if you own agricultural or horticultural cooperation.
Qualified Real Estate Investment Trust / Publicly Traded Partnership Income
This element of the deduction accounts for 20% of the total qualified REIT and PTP income. In this case, your deduction will not be subject to W-2 Wages or UBIA qualified property. Based on your income, the qualified PTP income will be subject to certain limitations depending upon the type of business engaged in by the PTP.
What are the eligible tax years?
The deduction is eligible from the tax year beginning 31st December 2017 up till 31st December 2025. You would be eligible for the deduction irrespective of whether you itemize the deductions on Schedule A or take the standard deduction.
What is a qualified business income?
Qualified Business Income accounts for the net amount of qualified elements of income, gains, deductions, and losses from a qualified trade or business. In QBI, only the taxable items of the income are accounted for and shall be connected to a U.S. trade or business.
What is a qualified business or trade?
A qualified business is any business that falls under the purview of section 162 of the IRS code of the IRS. However, there are three exceptions:
- C Corporation business or trade.
- Specified Service Trades or Business (SSTBs) for taxpayers whose taxable income increases the tax threshold. SSTB shall be in any of the fields such as health, accounting, law, actuarial sciences, performing arts, consulting, athletics, financial services, investing and investment management, etc.
- Any service provider which the IRS deems to render its services as an employee, even if its an individual contractor.
How to apply for the qualified business deduction?
You can apply for these deductions while filing your 2019 federal income tax returns by filling out the following forms: –
- Form 8998 — Qualified Business Income Deduction Simplified Computation
- Form 8995-A — Qualified Income Business Deduction
These two forms will replace the previously used worksheets placed in the Form 1040 instructions and Publication 535.
What is the threshold amount for qualifying for a Qualified Business Deduction?
The qualifying amount is $1,57, 500 when filing as an individual taxpayer and $3,15,000 if filing jointly as a married couple.
Do you need to materially participate in a business to qualify for the business deduction?
No, Under section 469, material participation is not required to qualify for a business deduction. All qualifying taxpayers who earn an income from a qualified trade or business will be eligible for a deduction regardless of the fact if they participate in it directly or not.
Qualifying for this business deduction can give you a significant tax break of up to 20% on your qualified income. The reforms in the Tax Cuts and Jobs Act is proving to be beneficial to many taxpayers by substantially reducing their tax liabilities. But, to be eligible for such deduction, you need to keep many things in mind as there are different conditions for different types of businesses. So, if you plan on keeping the most of your hard-earned dollars to yourself while filing your 2019 returns, contact your MyTaxFiler expert and know all about the Qualified Business Deductions and related matters.