Qualified Business Income Deduction: What Business Owners and Partners Should Know

At the beginning of this year, the Qualified Business Income Deduction (QBID) was introduced, allowing business owners to deduct a portion of their taxable business income. While we have touched on the QBID before, new details have since been given regarding this deduction. So, here are a few other things that you should know about deducting your qualified business income. For more information, or for help in maximizing your benefit from this deduction, contact one of our tax preparers in Provo.

Who Does This Deduction Apply To?

The Qualified Business Income Deduction applies to most business owners. This deduction can be taken prior to calculating your taxable income, so it can make a large difference on your return when handled properly. Note that it applies only to your income through the business, and not to any other income you might claim on your return.  Guaranteed payments to partners, however, are not eligible for the deduction.

Possible Caps on Your Deduction

As mentioned in our previous blog, this deduction allows business owners to deduct as much as 20% of their taxable business income. Most business owners will be able to deduct the full 20% of the qualified business income, as long as their taxable income is under $315,000 if filing jointly, or under $157,500 for individual filers.

However, there is an additional cap placed on this deduction if your taxable income exceeds the amounts listed above. In these instances, your deduction will be capped at half the amount that your business paid in W-2 wages during the year. So, if you earned $250,000 in qualified business income in 2018, 20% of that income would be $50,000. But if your total taxable income on your jointly filed return is over $315,000, and your business only paid out $80,000 in W-2 wages, your deduction would be capped at $40,000 (50% of the amount paid in W-2 wages) instead of the full 20% deduction.

There are also certain industries that begin to phase out the QBID at the income thresholds mentioned above, so it’s important that you talk with a CPA regarding this deduction to ensure you qualify. However, most small-business owners will likely receive the full 20% deduction through the QBID.

If you need assistance in claiming your deduction, or you’re unsure whether or not you qualify for the QBID, please reach out to one of our tax preparers in Provo. We can help you with maximizing this deduction, and ensuring you get the best possible outcome on your 2018 tax return.