By Yuling Liu, CPA, Schwartz & Schwartz CPAs
What is Qualified business income deduction?
Section 199A qualified business income deduction is available from 2018 to 2025. Taxpayers may deduct 20% of Qualified Business Income from partnerships, S Corporations, Sole Proprietorships (Schedule C’s) and Real Estate Rental Activities (Schedule E’s). This deduction was enacted to help pass-through entities who didn’t receive the benefit of 21% C-corporation tax rate.
A sole proprietor with net Schedule C income of $100k can now take a tax deduction of $20k on his or her personal tax return, subject to income limitations discussed below.
Calculation of Section 199A deduction
The deduction is a function of the taxpayer’s taxable income, net business income, and the wages paid and/or property owned by the business, and is generally based on the following:
- 20% of taxpayer’s qualified business income.
- The greater of 50% of the business’s W-2 wages or 25% of the business’s W-2 wages plus 2.5% of the original cost of all qualified property.
Full QBI deduction for Single taxpayers with taxable income below $157,500 and Married Couples with joint income below $315,000
For the single taxpayer with total taxable income below $157,500 ($315,000 for married filing jointly), the W-2 wages limit does not apply. Instead, the deduction will be limited to the lesser of 20% of the qualified business income or 20% of the total taxable income. It does not matter what kind of trade or business the taxpayer has.
Fully phased-out QBI deduction for Single taxpayer with taxable income exceeding $207,500 and Married Couples with joint income in excess of $415,000
Once the single taxpayer’s taxable income exceeds $207,500 ($415,000 for MFJ), taxpayer’s section 199A deduction is limited to the lesser of 20% of taxpayer’s qualified business income or the greater of 50% of W-2 wages or 25% of W-2 wages plus 2.5% of depreciable property.
But a specified service business is no longer eligible for this deduction.
A specified service trade or business means any trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, including investing and investment management, trading, or dealing in securities, partnership interests, or commodities.
Partially phased-out QBI deduction for Single taxpayer with taxable income between $157,500 to $207,500 and Married Couples with joint income between $315k to $415k
When a single taxpayer’s taxable income exceeds $157,500 ($315,000 for MFJ), the W-2 limitation is phased in. The deduction is limited to the lesser of 20% of taxpayer’s qualified business income or the greater of 50% of W-2 wages or 25% of W-2 wages plus 2.5% of depreciable property. The qualified business income should be adjusted by an exclusion amount.
For example: An individual has taxable income of $177,500, QBI of $100,000. Base is $157,500. Top range is $207,500. The difference is $50,000.? Amount over base is $20,000. Percentage that should be excluded from QBI: $20,000/$50,000=40%. So, the exclusion amount is $40,000. Adjusted QBI is $60,000. Deduction is $30,000 ($60k*20%).