The Qualified Business Income Deduction is a relatively new tax deduction enacted under the 2017 Tax Cuts and Jobs Act (TJCA), that is eligible to all individual taxpayers who have income either through a pass-through entity (S-corporation or partnership), rental income (Schedule E), or are self-employed (Schedule C). The term Qualified Business Income (QBI) is income from a trade or business under the Internal Revenue Code’s Section 162, which states the income must be from business conducted regularly and for the purposes of making a profit. There are certain limitations to Qualified Business Income. For example, if your income is deemed a specialized service trade or business (SSTB) in which your company makes income via a specialized service, such as accounting or consulting services.
The Qualified Business Income Deduction is extremely beneficial when planned for properly by your tax accountant as it provides a deduction by filing Form 8995 or Form 8995-A. Generally, the Qualified Business Income Deduction is up to 20% of the taxpayer’s Qualified Business Income, so long as 20% of the taxpayer’s Qualified Business Income is greater than:
- 50% of the entity’s QBI eligible wages paid during the tax year, or
- The aggregate of 25% of the entity’s QBI eligible wages and 2.5% of the entity’s unadjusted basis in depreciable assets/property immediately after acquisition (UBIA)
If the qualified business income is lesser than #1 or #2 above, the Qualified Business Income Deduction will be limited to the amount of the #1 or #2, whichever is higher.
For profitable entities, the QBI deduction can be a complete game-changer for the business owner in terms of tax savings on their personal income tax return, since they can now get a deduction of as much as 20% of their qualified business income on their Form 1040. This was enacted when corporate tax rates decreased from 35% to 21% to allow pass-through entities to be more competitive from a tax perspective. Effectively, it can reduce your personal tax rate on qualified business income from 37% to 29.6%.
CASE STUDY: How One Review of a Tax Return Revealed Six-Figure Savings.
In 2024, we spoke with a few potential clients, and we asked to see their prior year tax returns. When reviewing those tax returns, we noticed that no QBI deduction was being taken on the business owner’s personal returns. We immediately did a deeper analysis and calculated what the potential tax savings would have been to the taxpayer had they taken advantage of the QBI deduction, which they were entitled to. The tax savings in this scenario was a 6-figure number. Once we brought this to the attention of the potential client, we were immediately engaged to prepare amended business and personal returns to claim the deduction and in turn get refunds from the IRS since the total tax liability significantly decreased. The potential client was able to get additional cash flow that he needed to operate his business simply by taking a deduction that he was entitled to. Unfortunately, due to the statute of limitations rules, we were not able to amend all years, but did manage to amend all years that still had the statute open.
Being that this is a relatively new tax law and deduction, some tax professionals aren’t aware of the deduction or the potential tax benefits of planning and filing for the Qualified Business Income Deduction. If the QBI deduction is not reported on a return, the IRS will never reach out to the taxpayer to inform them of this, so it is the responsibility of the taxpayer and their tax professional to make sure they are taking advantage of this deduction.
If you have income on your personal return, either from a rental property, self-employed business, S-corporation, or partnership, look at your tax filing and make sure your tax professional is filing for the Qualified Business Income Deduction. If you do not see the deduction on the return, or do not see that Form 8995 or Form 8995-A were filed in your return, inquire with your tax professional to see if they were aware of the deduction and ask why it was not claimed.
Find out about more about the Qualified Business Income Deduction or other deductions and tax credits you may qualify for. Contact us for a free tax consultation today at sasscpas.com or by contacting us at (631)368-3110.