You might remember the 2017 tax reform called the Tax Cuts and Jobs Act. Part of that legislation includes the qualified business income deduction, which applies to certain businesses and self-employed people.
What is the qualified business income deduction?
In a nutshell, it allows eligible businesses to deduct up to 20 percent of their total taxable income.
In general, qualified businesses include those with pass-through income. Pass-through income refers to business income that is reported on an individual’s personal tax return.
This includes partnerships, S corporations, sole proprietorships and limited liability companies, for example. It does not include C corporations or money earned as an employee.
How is it calculated?
Typically, the qualified business income deduction is the smaller amount between one of two options.
First, it’s 20 percent of your qualified business income plus 20 percent of other income such as real estate investment dividends or publicly traded partnership income.
Or, it’s 20 percent of your total taxable income minus net capital gains.
Of course, figuring out if your business qualifies isn’t always so cut and dry. There are certain limitations that could affect if, or how much, you can claim.
What are the limitations?
For starters, there is the income threshold. To qualify for the full 20 percent deduction for 2022, for instance, your taxable income must be under $170,050 for a single filer. That figure jumps to $340,100 for joint filers.
However, once you pass the limit, the qualified business income deduction begins to decrease or possibly disappear altogether. At this point, things also get more complicated due to other factors.
So, it might be a good idea to work with a tax professional if your qualified business income is higher than the initial limit.
If you want to find out if your business is eligible for the qualified business income deduction, request your free consultation with us today. We can talk about topics like this and much more. Meanwhile, find additional business accounting tips and other news by reading our blogs.