Table of contents
Square cannot provide advice on tax issues. This article is for educational purposes and does not constitute legal or tax advice. For specific advice applicable to your business, please contact a professional.
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 deduction?
The 199A deduction refers to the Tax Cuts and Jobs Act, Provision 11011 Section 199A. This deduction is potentially available to individuals who own or are a part of sole proprietorships, partnerships, S corporations, and some trusts and estates. You may be able to deduct 20% of qualified business income (QBI) when paying your taxes if you own a qualifying business.
For example, for a qualifying company with a single owner that made $100,000 in profits, the QBI could lower the taxable revenue by the business to $80,000. For a business owner paying a 24% tax rate, that’s a savings of $4,800 on the owner’s income taxes. The savings may also vary depending on the type of business you own, your marital status, and tax rate.
What is qualified business income?
Is QBI 20% of revenue? 20% of EBITDA? According to IRS guidelines for most businesses, the “QBI is the net amount of qualified items of income, gain, deduction, and loss from any qualified trade or business.” The IRS further notes that capital gains and losses, certain dividends, and interest income are not included in the 20% QBI calculation. Additionally, W-2 income, as well as amounts received as reasonable compensation from an S corporation, are also not considered to be part of the QBI calculation.
What businesses qualify an owner for the QBI deduction?
IRS regulations determine which businesses qualify owners for the QBI deduction. The QBI deduction is typically permitted for owners of sole proprietorships, partnerships, 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. The IRS notes that owners of C corporations are not eligible for the QBI deduction.
There is a special category for specified service trades or businesses (SSTBs). If your business is in health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, investing and investment management, trading or dealing in certain assets, or relies on you or your employees making paid endorsements, you may not be able to claim this deduction if your income is over specific limits. Limits vary based on business income and revenue sources.
For business owners eligible for the QBI, income limits generally apply, as does a phase-out. These limits change annually.
The 199A deduction may offer significant tax savings to qualifying business owners. If you’re not sure if you qualify, it’s worth consulting with a trusted tax expert who can help you make sure to maximize your tax savings.