The Qualified Business Income Deduction (QBI) / Section 199a Deduction

qbi deduction

Take Advantage of the New Tax Credits

Everyone should be familiar with the Tax Cuts and Jobs Act tax reform which was enacted in December, 2017, primarily because of the extensive news coverage it received as members of Congress debated its merits or lack thereof. However, besides the main points raised on income based tax rates, property tax deductions and standard deduction increases, there were many lesser known changes and additions that were not commonly televised. Section 199A, a deduction for qualified business income (QBI), is one of them. The Section 199A deduction is designed to give non-C corporations a comparable tax cut in response to the sizable tax cut C corporations received in 2017. Companies should consult a local CPA firm to help provide guidance on this new deduction.

Who qualifies for this deduction?

The Section 199A deduction is a deduction that can be taken for up to 20% of QBI from partnerships, trusts, sole proprietorships, limited liability companies (LLCs), estates and S corporations. While the basic deduction is equal to 20 percent of the QBI of the taxpayer’s qualified businesses, the full calculation depends on several factors that can phase out part of the deduction.

Certain restrictions and limitations apply. For instance, the portion attributable to 20% of the QBI cannot exceed the greater of 50 percent of the company’s W2 Wages or the sum of 25% of the W-2 Wages plus 2.5% of qualified property. There is a wages and wages plus capital limitation that applies to taxpayers with income exceeding $315,000 for joint filers and $157,000 for single filers.

Another restriction is for specified service businesses, which effectively disallows this deduction in some cases. Specified service businesses are defined as businesses that provide law, financial, accounting and other similar services or those businesses whose main assets are the reputation or skill of an owner or employee.

Frequently asked questions about the new Section 199A deduction are often questions about farm cooperatives, income thresholds, non-patronage payments from cooperatives and whether to file tax returns jointly or separately. These questions can be best answered by a dependable accounting firm. While Section 199A can provide tax reform relief to many businesses, the deduction can be confusing.

Due to the complexity of this deduction and the value of planning various strategies to take advantage of all the Section 199A deduction can offer, it is imperative to consult with a local CPA firm. Launch CPA, a San Diego CPA firm, can assist you with your questions. Not only do local businesses need help maneuvering the ever changing tax landscape, they also need to implement long-term tax strategies that will fully utilize such credits.

Launch CPA offers bookkeeping, tax and consulting services to aid in the implementation of both immediate and long-term objectives for small to mid-size businesses. Speak to someone today and see how Launch CPA can help you!

Call us today at (619) 663-7275 to receive a free consultation!

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