QBI Deduction for Small Businesses: What You Need to Know | by Danielle Michel, CPA

Understand the Qualified Business Income (QBI) deduction, how it works, who qualifies, and how to claim it before it potentially expires.

If you're a small business owner or self-employed, the QBI deduction (Qualified Business Income deduction) could lead to significant tax savings. But with potential expirations and complex rules, it's essential to understand this deduction inside and out.?

Let's get into it.

What Is the QBI Deduction?

• ?Introduced in 2018, the QBI deduction offers a way to reduce your taxable income by up to 20% of your "qualified business income."
• ?It’s designed for owners of pass-through entities (S corporations, partnerships,LLCs) and self-employed individuals.
• ?Think of it as a reward for contributing to the U.S. economy with your business activities.

How Does It Work?

The core idea is simple:

• ?Calculate QBI: Your net business profit – excluding things like investment income or employee wages.
• ?Take Your Deduction: Reduce your taxable income by up to 20% of the calculated QBI amount.

Example: QBI of $50,000 could mean a potential deduction of up to $10,000.

Important Limitations

• ?Income-Based: Your eligibility hinges on your taxable income and the type of business you have. Be aware of income thresholds!
• ?Potential Expiration: Currently, the QBI deduction is set to expire after 2025 unless Congress takes action.

Income, Business Type, & the QBI Deduction

Your income level and business type dictate whether you qualify for the full deduction, a partial deduction, or no deduction at all:

Below the Threshold: If your taxable income falls below a certain amount (adjusts annually), you might be eligible for the full 20% deduction.

Above the Threshold: Things get complex and may limit your deduction based on:

• ?The nature of your business
• ?Wages paid to employees
• ?The value of your business property

Specified Service Trades or Businesses (SSTBs): Professionals like doctors,lawyers, accountants, etc., face stricter income limits and could lose the deduction entirely at higher income levels.

Time Is of the Essence

With the potential expiration of the QBI deduction after 2025, time is ticking to take advantage of this significant tax benefit for small businesses.

Next Steps: How to Make the Most of the QBI Deduction

• ?Assess Your Eligibility: Determine if your business type and income qualify.
• ?Accurate Recordkeeping: Meticulous records are crucial for calculating your QBI accurately.
• ?Consult a Tax Professional: Navigate the complexities and maximize your potential savings, especially if you're in an SSTB or near the income limits.

Don't miss out on this valuable tax break! Understanding the QBI deduction and taking proactive steps could make a real difference in your business's financial success.

FAQ: The QBI Deduction

Q: I'm a small business owner. Am I eligible for the QBI deduction??

A: Possibly! Eligibility depends on your business structure (pass-through or sole proprietorship), your taxable income, and the nature of your business. Generally, owners of S corporations, partnerships, LLCs, and self-employed individuals could qualify.

Q: How is the QBI deduction amount calculated??

A: It starts with your Qualified Business Income (QBI), which is your net business profit excluding things like capital gains or wages. You can potentially deduct up to 20% of your QBI from your taxable income.

Q: Are there income limits that affect the QBI deduction??

A: Yes! Income-based phaseouts and limitations apply. If your taxable income is below a certain threshold, you might claim the full deduction. Above that, things get complex depending on your business type, wages paid, and business assets.

Q: What is an SSTB and how does that impact my QBI eligibility??

A: SSTB stands for Specified Service Trades or Businesses. This covers occupations like doctors, lawyers, financial advisors, etc. SSTBs face more stringent income limits and could lose the QBI deduction entirely at higher income levels.

Q: The QBI deduction is set to expire. What does that mean for my business??

A: Currently, the QBI deduction ends after 2025 unless extended by Congress. If it expires, small business owners may face higher tax burdens. It's essential to take advantage of this deduction while it lasts and plan for potential changes.

Q: Is the QBI deduction complex? Should I consult a tax professional??

A: The rules surrounding the QBI deduction can be complicated, especially if you're near income thresholds or operate an SSTB. A tax professional can help you assess your eligibility, maximize your deduction, and stay updated on any legislative changes.

About the Author:

Danielle Michel is a force to be reckoned with in the world of entrepreneurship. As a serial entrepreneur and venturist, she's founded the highly successful Manufacturing Tax Recovery Services (MTRS), hosts the insightful business podcast "The Upside Downside", and actively builds her real estate investment portfolio. Driven by her own experience as a once "suppressed entrepreneur", Danielle is set to launch her first book "the Suppressed Entrepreneur to Thriving Entrepreneur" - a guide designed to empower aspiring business owners. Her commitment to promoting health and wellness reflects a belief in a balanced and fulfilling life. Whether it's maximizing your business's bottom line, finding inspiration to launch your venture, or exploring the world of real estate, Danielle is ready to connect and collaborate.