The 2017 Tax Cuts and Jobs Act (TCJA) was a sweeping piece of legislation that changed many things most business owners had become accustomed to. While there are many new provisions enacted and old ones that have gone away, there is one in particular that started an onslaught of chatter amongst tax professionals and business owners alike. We will try to focus on that particular one in this post as a way to empower those who either have not heard of, or have heard but are somewhat confused on the subject, to be proactive in their communications with their professional advisors.
The provision mentioned above is known as Section 199A, more specifically the part of this provision that has created such fervor is known by several names (accountants are still trying to settle on one as a standard), among them are: 199A deduction, 20% deduction, TCJA deduction, QBI Deduction, QBID or Qualified Business Income Deduction. We will refer to it simply as QBID to keep things consistent.
What does it do? How does it benefit my business? Glad you asked. At its most simple, this is a deduction for ‘pass-through businesses’ which allows business owners to reduce profits by up to 20% and only be taxed on the other 80%. A necessary warning: as many things in the Internal Revenue Code, nothing is ever quite this simple however. There are multiple tests and criteria that must be taken into consideration to determine whether a business qualifies, and readers are encouraged to be aware of these before expecting a clear 20% haircut off their profits for 2018 and later.
First, what is a pass-through? If your business is set up as an S-corporation, or an LLC – single member or otherwise, or a Partnership, or even if you just report your business income on Schedule C on your personal return, the QBID may be available to you. The QBID is primarily based on what your QBI or Qualified Business Income is, keep in mind this number may differ from your actual net profit, so beware and be aware of this. Second, limitations exist based on such things as your industry, total business income, taxable income, how much you paid in wages, and even whether you’re married. Third, the QBID may apply to different businesses differently even if the owner happens to be the same person. Lastly, while the deduction is connected to the business, much like reporting your business income in the past, claiming this deduction and enjoying the tax savings is shown on your individual return (Form 1040).
In short, as a business owner you may benefit from making a portion of your income tax-free, which you can then reinvest into your business, add to your retirement savings, take the family on vacation, or whatever your heart desires.
The application and eligibility of the QBID to your business or businesses in practice can be complex. You are highly encouraged to discuss this with a tax professional.