Qualified Business Income Deduction
If you have a small passthrough business (Sole proprietor, LLC, or Sub S) and have a profit in 2018 you may be eligible for a personal deduction of up to 20% of that profit. The rules for this are very complicated and should not be tackled on your own without intense personal study of the rules.
The deduction equals 20% of “qualified business income” QBI which is basically an owner’s share of profits with some adjustments. QBI is defined as the net amount of items of income, gain, deductions and loss from your business. It does not include capital gains, including Section 1231 gains or loss, dividends earned, or interest income other than interest income properly allocated from your business. It also can’t include any business loss carryforwards (need to follow specific rules for this).
If your taxable income in 2018 is over $157,500 or $315,000 if filing jointly special rules relative to the 20% apply. Your deduction is the lesser of 20% of QBI or 1. The greater of 50% of the total w-2 wages paid by the business to all its employees or 2. 25% of W-2 wages paid to employees plus 2.5% of the unadjusted basis immediately after acquisition of depreciable tangible property owned by the business. Qualified Property is defined as depreciable business property for which the “depreciable period’ has not ended by the close of the year.
One can add to the deduction qualified REIT dividends and qualified PTP (Publicly Traded Partnership) income.
If you are in a specified trade or business and your income exceeds the limitations, your deduction will be reduced and/or eliminated if the income is above $415,000 on a joint return or $207500 for a single filer. “Specified Service Business” is defined as doctors, lawyers, accountants, consultants, financial advisors, actuaries, athletes and performing artists as well as owners of other older businesses where the reputation or skill of the owners is a principal asset of the business.
There are worksheets for those that may qualify and must be filled in prior to inserting numbers in your tax software…
If you are a small business owner be sure to consult with a professional on this.