09 Nov How the Qualified Business Income Deduction Can Impact Your Tax Return
If you are an owner or partner in a business, filing your tax return is significantly more complex than it is for individuals filing only a personal return with W-2 earnings. There are numerous additional laws, deductions, and considerations that you must keep in mind while filing, and ensuring you get the maximum benefit on your return can be quite difficult.
One such deduction introduced at the beginning of this year is the Qualified Business Income Deduction (QBID), which can have a significant impact on your tax return. We touched briefly on this deduction when it was first introduced, but here are some additional details to help you understand how it might impact you. Be sure to work with a Provo tax preparer if you want to claim this deduction on your return.
Who Is the QBID For?
To qualify for this deduction, you must be an owner or partner in a business. The deduction would apply only to the income you receive through this entity, and not to any other income you might report on your tax return. The QBID is applied to your income prior to calculating your total taxable income, so it can significantly reduce the amount you pay in taxes, if the deduction is properly claimed.
Determining Your Maximum Deduction
For the majority of business owners, the QBID will allow them to deduct 20% of their qualified business income prior to calculating their taxable income. However, for joint filers with more than $315,000 in income, or individual filers with more than $157,500 in income, there may be an additional cap placed on your maximum deduction.
If your income exceeds the amounts listed above, your deduction may be capped at half the amount your business paid out in W-2 wages during the year. For example, if you have $250,000 in qualified business income for this year, and this is the only income on your joint return, you could deduct as much as $50,000 (20% of that business income), even though your business only paid out $80,000 in W-2 wages. However, if you are filing jointly, and your total household income exceeds $315,000, your deduction would be capped at $40,000 (half the amount that your company paid in W-2 wages).
In certain industries, the QBID begins to be phased out when your total income exceeds the amounts mentioned above, so it’s vital that you work with a Provo tax preparer to ensure that this deduction is handled in a way that is appropriate to your unique situation. In most cases though, small-business owners will be able to deduct 20% of the qualified business income prior to calculating their total taxable income.
To get help in understanding the QBID and how it applies to your tax return, contact The Accounting Guys, and one of our experienced tax preparers will provide the expert assistance you need.