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If you own a small business, it might be helpful for you to know about the 199A deduction, often referred to as the Qualified Business Income (QBI) deduction. Under this regulation it may be possible for qualifying small-business owners to deduct 20% of their business’s profits from their own taxes, potentially leading to significant tax savings. Here’s a closer look at the 199A deduction and how you may be able to save on your taxes.
What is the 199A QBI deduction?
The 199A QBI deduction was put in place as part of the Tax Cuts and Jobs Act (TCJA). This deduction is available to individuals who own or are a part of pass-through trades or businesses that are designated as sole proprietorships, partnerships, LLCs, S corporations, and some trusts and estates. You are able to deduct 20% of QBI when paying your taxes if you own a qualifying business, subject to certain limitations. This deduction was put in place to help equalize the corporate tax rate cuts put in place by the TCJA, for which other legal business structures did not apply.
If you own a qualifying company, you can use Form 8895A to figure out how much of your income is considered QBI. If you meet certain requirements, you can then deduct 20% of that QBI and effectively lower your taxable income and your total tax due. Keep in mind that your savings will vary depending on the type of business you own, your marital status, and your tax rate.
What is QBI?
Is QBI 20% of net revenue? Or is it 20% of earnings before interest, taxes, depreciation, and amortization (EBITDA)? According to IRS guidelines for most businesses, “QBI is the net amount of qualified items of income, gain, deduction, and loss from any qualified trade or business.” The IRS notes that capital gains and losses, certain qualified dividend income, and interest income are not included in the 20% QBI calculation. Additionally, W-2 income and amounts received as reasonable compensation from an S corporation are not considered part of the QBI calculation. This computation is complex and is impacted by several factors. If you are uncertain on the qualifiers, please consult a tax expert.
What businesses qualify an owner for the QBI deduction?
IRS regulations determine which business owners might be eligible for the QBI deduction. While the QBI deduction is typically permitted for owners of sole proprietorships, partnerships, LLCs, S corporations, and some trusts and estates, dividends from a real estate investment trust (REIT) or a publicly traded partnership (PTP) may also be considered part of your QBI deduction. The IRS notes that taxable income earned through a C corporation is not eligible for the QBI deduction.
There is a special category for specified service trades or businesses (SSTBs). If your business is in any of the following categories, you may not be able to claim the QBI deduction if you income is over certain limits:
- Health
- Law
- Accounting
- Actuarial science
- Performing arts
- Consulting
- Athletics
- Financial services
- Investing
- Investment management
- Trading or dealing in certain assets
- Business that relies on you or your employees making paid endorsements
Limitations for QBI deductions in 2024
QBI deduction limits generally apply, as does a phase-out. These limits change annually.In 2024, if your total taxable income is at or below $191,150 for single filers or $383,900 for joint filers, you may qualify for the 20% QBI deduction on your taxes. Be sure to check the latest IRS guidelines for more information. If you’re engaged in an SSTB, you may not qualify for the QBI deduction if your income is over $241,950 for single filers and $483,900 for joint filers.
What does not qualify for the QBI deduction?
A number of income sources do not qualify for the QBI deduction. They include:
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Items that are not properly includable in taxable income
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Investment items, such as capital gains or losses
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Interest income not properly allocable to a trade or business
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Wage income
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Income unconnected with the conduct of business within the United States
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Commodities transactions or foreign currency gains or losses
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Certain dividends and payments in lieu of dividends
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Income, loss, or deductions from notional principal contracts
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Annuities, unless received in connection with the trade or business
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Amounts received as reasonable compensation from an S corporation
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Amounts received as guaranteed payments from a partnership
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Payments received by a partner for services other than in a capacity as a partner
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Qualified REIT dividends
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PTP income
The 199A QBI deduction may offer significant tax savings to qualifying business owners. If you’re not sure whether you qualify, it’s worth consulting with a trusted tax expert who can help you make sure to maximize your tax savings. Your restaurant technology can help.Business owners who use Square Payroll, Square Banking, and other Square tools, for instance, have an easier time preparing an accurate tax return and taking advantage of the QBI benefits they deserve.
