Small business owners have a unique new tool in\nthe TCJA – the QBI deduction. This tool provides a real opportunity to reduce\ntaxable income and therefore tax liability. \n\nThe QBI deduction is\navailable from 2018-2025 and is only for pass-through entities (businesses that\nare not C Corporations). This deduction is available without income\nrestrictions for businesses that are deemed a \u2018Qualified Business\u201d.\n\n\n\n<\/p>\n\n\n\n The chart above specifies that to qualify for\nthis deduction you must be a Qualified Business. To be a Qualified Business it\ncan\u2019t be a service business or be a trade or business that involves the\nperformance by the employer of services as an employee. The following are NOT a\nQualified Business: doctors, lawyers, accountants, performers, athletes, health\ncare professionals, financial and broker service providers, partnership\ninterests. Only two service providing businesses are considered a Qualified\nBusiness: engineering and architectural firms. Though unclear in the code as to\nhow gray areas would be decided the key catchall is that you can\u2019t be a\n\u2018Qualified Business\u2019 if the business\u2019 principal asset is the reputation or\nskill of one of the owners. Most of our clients own excluded (non-qualified)\nbusinesses. <\/p>\n\n\n\n As an excluded business owner (such as\nattorneys, consultants, etc.) you MAY STILL qualify for this QBI deduction IF\nyour personal taxable income falls below the limits of $315K and $157.5K\n(married filing jointly and single filer respectively). <\/em><\/strong><\/p>\n\n\n\n The QBI rule allows a Qualified Business (or\nexcluded businesses that qualify under the taxable income limits) to reduce\ntheir taxable income by 20% of their QBI <\/strong>(QBI is business profit, not W2\nincome). An IMPORTANT CAVEAT <\/strong>is that the 20% deduction is the lesser\nof QBI or taxable income<\/strong>. <\/p>\n\n\n\n For example, if your business profit is $200K\nand your taxable income is $100K the actual deduction is $20K not the $40K that\nyou might have expected. Regardless this new tool does provide for a way to\nreduce taxes. <\/em><\/p>\n\n\n\n When I initially reviewed the code, I was very\nexcited for the Qualified Businesses owned by our clients since they were to\nbenefit regardless of income. It was not until the last few months that a\ncomplicated wrinkle has limited this excitement. We\u2019ve found that even\nQualified Businesses have hurdles if the taxable income exceeds these same\nlimits ($315K\/$157.5K for married filing jointly and single filer\nrespectively). If the business owner\u2019s taxable income exceeds these income\nlimits, then two additional rules are used rather than just receiving a\ndeduction of 20% of QBI. For Qualified Businesses in excess of these limits\nthere is a two-pronged test to measure the lesser <\/em>of 20% of QBI (profit)\nOR the greater of either <\/em>50% of all W2 wages or W2 wages plus 2.5% of\nyour qualified equipment\/land costs. Yes, after jumping all of these hoops we\nfound that some QB businesses didn\u2019t qualify for 20% of QBI because the W2\nweren\u2019t high enough. Even so, the business owner did obtain a deduction though\nnot as high as was initially estimated. <\/p>\n\n\n\n Added to the QBI deduction the TCJA rules also\ninclude these changes: <\/p>\n\n\n\n 1. Entertaining clients is no longer a business\nexpense that is deductible federally (it used to be 50% deductible). Office\nparties are still 100% deductible. <\/p>\n\n\n\n 2. Businesses supported by debt financing can\nonly deduct 30% of the owner\u2019s adjustable taxable income BUT don\u2019t despair\nsince it will only apply to small businesses that have gross receipts of $25M\nfor each of the last three years. <\/p>\n\n\n\n 3. NOL deduction (Net Operating Loss) which is\noften carried back two tax years or future 20 years will now be only allowed\nfor years going forward AND limited to 80% of income in that year. <\/p>\n\n\n\n I\u2019m providing this\neducation article to give perspective on how you benefit from the TCJA tax\nrules. Our ultimate goal is to have you knowledgeable enough to understand the\ncritical role of taxes in your planning. If you have additional questions feel\nfree to ask us or your tax preparer. <\/p>\n\n\n\n Edi Alvarez, CFP\u00ae<\/sup> www.aikapa.com<\/a><\/strong><\/p>\n","protected":false},"excerpt":{"rendered":" I\u2019ll quickly summarize the impact of the TCJA (Tax Cuts and Jobs Act) that we\u2019ve observed on personal taxes and then I\u2019ll switch to the impact on small business owners by covering QBI (the Qualified Business Income) and changes to … Continue reading ![\"\"](\"https:\/\/www.aikapa.com\/Financial_Bites\/wp-content\/uploads\/2019\/09\/Overview-of-QBI-Deduction.jpg\")
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