The New 20% Income Deduction for Business Owners: Do You Qualify?

Unless Congress passes legislation to extend or modify the deduction, it will no longer be available starting in 2026. Business owners should monitor legislative developments and consider tax planning opportunities while the deduction remains in effect. Smart business owners don’t just claim the QBI deduction—they structure their finances proactively to maximize it. Manay CPA is a reputable, full-service CPA firm based in Atlanta, Georgia. Founded in 2001, we provide comprehensive accounting and tax solutions to individuals and businesses across all 50 states. The deduction is up to 20%, and it depends on income, business type, and other factors.

Limitations of the QBI Deduction

• Also, you must be running the business with the intent to make a profit.
• You are eligible to claim a QBI deduction if you have ownership interests in a qualified business or trade.
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• One such option is a tax deduction called the Qualified Business Income (QBI) that was introduced in 2017 by the Tax Cuts and Jobs Act (TCJA).
• This distinction often surprises taxpayers expecting a broader tax savings.
• Understanding these rules helps you maximize your deduction and effectively manage your tax liability.

However, it does not apply to incomes earned from a C-Corp or as a W-2 employee. The QBI deduction, also called the Section 199A deduction, is available for self-employed individuals, small business owners, and others who receive income through pass-through entities. The deduction is limited to the lesser of the QBI component plus the REIT/PTP component what is qualified business income deduction or 20 percent of the taxpayer’s taxable income minus net capital gain. The QBI deduction is generally available to businesses organized as sole proprietorships, partnerships, S corporations, and LLCs.

• Explore our hands-on approach to QBI deductions and more by becoming a tax client, and discover how the right tax strategy can enhance your overall financial well-being.
• Income from C corporations, wages as an employee, and payments received for services not provided as a partner don’t qualify for the QBI deduction.
• Below are two simplified scenarios illustrating how the QBI deduction might apply in different business setups.
• The main purpose of the QBI deduction is to provide tax relief for owners of pass-through businesses, which don’t pay corporate income tax.
• To have precise data ready for calculating your QBI deduction during tax season, use Ramp’s expense management software to automatically categorize transactions and maintain accurate records year-round.
• The qualified business loss must be apportioned among all your trades or businesses with QBI in proportion to their QBI.

QBI Deduction for Self-Employed Individuals

Separate 20% components exist for qualified REIT dividends and qualified publicly traded partnership (PTP) income. While various types of business income are eligible for the QBI deduction, certain types aren’t. Wage income, income that’s not included in taxable income, capital gains and losses, and certain other types of income are excluded. The QBI deduction also excludes income generated by foreign currency gains, commodities transactions, and certain dividends. Calculating the QBI deduction requires understanding your qualified business income and determining whether limitations apply based on your income level and business type. The process differs for businesses below and above the income thresholds.

How do you report QBI deduction?

Your business entity type directly affects your QBI deduction opportunity. Pass-through entities (LLCs, S Corps, partnerships, sole proprietorships) all qualify. However, an S Corporation election combined with a professional entity structuring strategy can amplify your deduction. By paying yourself a reasonable W-2 salary and https://www.bookstime.com/ taking the remainder as distributions, you effectively increase the QBI available while managing self-employment taxes.

Working with a tax professional reduces these mistakes and helps optimize your tax strategy. The QBI eligibility is complex and requires a clear understanding of what constitutes business income. The eligibility largely depends on the type of Payroll Taxes business entity from a taxation standpoint and the nature of services offered. The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. The QBI deduction can lead to major tax savings, but not all business owners will qualify.

Determining Your QBI Deduction

Contemporaneous records must detail hours, dates and descriptions of the services and who performed them. If the services are done by contractors or employees, the taxpayer must keep logs of the work done by them, as well as proof of payment. By shifting the phase-out from abrupt to gradual, more small businesses, including SSTBs (Specified Service Trades or Businesses), will tap into the deduction.

Apply the 20% Deduction

• The QBI deduction, created under the Tax Cuts and Jobs Act (TCJA), lets eligible business owners deduct up to 20% of their qualified business income.
• Proper structuring and strategic planning unlock deductions that routine tax preparation often misses.
• We are compensated in exchange for placement of sponsored products and services, or by you clicking on certain links posted on our site.
• The net gain or loss as reported on your Schedule C (Form 1040) isn’t automatically includible in your QBI.
• The testimonials provided were dependent on the facts of the specific client’s situation.
• BDC dividend inclusion further extends reach—especially beneficial to diversified owners of finance or credit investments See Nat Law Review Article).

Alongside her accounting practice, Sandra is a Money and Life Coach for women in business. No matter which of these two forms you use, you’ll need to fill it out and run through the calculations to determine what the amount of your QBI deduction should be. When you’re done, you will attach it to your federal tax return when it comes time to file. The way your business is structured can have a big impact on how much of the QBI deduction you can claim. If you’re operating as a sole proprietorship, consider whether switching to an S corporation could offer more control.