Qualified Business Income (QBI) Deduction (Sec. 199A)

Starting in 2018 Individuals will qualify for a 20% deduction of qualified business income from some businesses (partnerships, S Corporations, or sole proprietorships). The new deduction is authorized by Section 199A of the Internal Revenue Code.

What are some general rules of thumb of Sec. 199A?

The qualified business income (QBI) deduction of Sec. 199A is limited to 20% of the excess of taxable income over net capital gain. For example, suppose a taxpayer has $100,000 of QBI, $120,000 of capital gain, and $40,000 of deductions. Taxable income in this example is $180,000, and the excess of taxable income of net capital gain is $60,000. Thus, the tentative tax deduction of $20,000 ($100,000 QBI x 20%) is limited to $12,000 ($60,000 x 20%).

If taxable income is less than $157,500 (single) or $315,000 (married), then the QBI deduction is simply 20% of the lesser of QBI or taxable income other than capital gain (subject to the taxable income limitation), regardless of whether the business is a specified service trade or business (SSTB) or whether the business pays W-2 wages. 

If taxable income is greater than $207,500 (single) or $415,000 (married), and the QBI is from an SSTB, the QBI deduction is $0. However, if the taxpayer has QBI from other sources, a deduction is still allowed for the non-SSTB businesses. If the QBI is from a non-SSTB, the deduction is allowed, but is limited to the greater of: 

1.      50% of the taxpayer’s allocable share of the W-2 wages paid by the business, or

2.      20% of the taxpayer’s allocable share of the W-2 wages paid by the business plus 2.5% of the taxpayer’s allocable share of the unadjusted basis of qualified property.

Please contact my office today at 248-514-6213 for additional information.

Andrew Jordan, CPA

The information provided is not intended as a substitute for legal or other professional services. Legal or other expert assistance should be sought before making any decision that may affect your situation.