QBI: The Game-Changer for Small Business Taxes
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Maximize Your Tax Breaks: QBI Explained
The Qualified Business Income Deduction, often referred to as QBI, is a tax deduction introduced through the Tax Cuts and Jobs Act (TCJA) of 2017. It allows eligible solopreneurs and small business owners to deduct up to 20% of their qualified business income. This deduction has the potential to significantly reduce the tax burden for many small businesses.
What is QBI?
Qualified Business Income refers to the net amount of income, gain, deduction, and loss related to any qualified trade or business. Essentially, it's the regular, day-to-day income a business earns.
However, QBI does not include certain types of income, such as capital gains or losses, dividends, and interest income (unless the interest is related to the business).
Who Can Claim the QBI Deduction?
The QBI deduction is available to different business structures and institutions:
- Sole proprietors
- S corporations
- Some trusts and estates
- Owners of multiple businesses (they can combine the QBI from each)
However, the deduction comes with some restrictions, especially for those in specified service trades or businesses (SSTBs) which include fields like health, law, consulting, athletics, financial services, and a few others.
Numbers on Taxable Income Limits for 2022 and 2023
If your taxable income is above a certain threshold, the QBI deduction might be limited or unavailable if your business is an SSTB. The tax limits and taxable income limits vary based on filing status and other factors.
Here are the numbers on taxable income limits for 2022 and 2023:
QBI deduction 2022
- Single Filers: Less than $170,050 (20% deduction)
- Single Filers: $170,050 to 220,050 (Partial deduction for SSTBs)
- Single Filers: More than $220,050 (No deduction for SSTBs)
- Married Filing Jointly: Less than $340,100 (20% deduction)
- Married Filing Jointly: $340,100 to $440,100 (Partial deduction for SSTBs)
- Married Filing Jointly: More than $440,100 (No deduction for SSTBs)
QBI deduction 2023
- Single Filers: Less than $182,100 (20% deduction)
- Single Filers: $182,100 to 232,100 (Partial deduction for SSTBs)
- Single Filers: More than $232,100 (No deduction for SSTBs)
- Married Filing Jointly: Less than $364,200 (20% deduction)
- Married Filing Jointly: $364,200 to $464,200 (Partial deduction for SSTBs)
- Married Filing Jointly: More than $464,200 (No deduction for SSTBs)
Key Points to Consider:
The QBI deduction is limited to the lesser of:
- 20% of your qualified business income, or
- 20% of your taxable income minus net capital gain.
W-2 Wages and Property Limitation
For those above the income threshold, the QBI deduction may be limited by the amount of W-2 wages paid by the business and/or the unadjusted basis of certain property used by the business.
For those in the SSTB category and above the income threshold, the deduction begins to phase out and can be completely eliminated if income exceeds the upper limit of the phase-out range.
To claim the QBI deduction, use Form 8995 or Form 8995-A, depending on the complexity of your situation.
Who Benefits from the Tax Relief?
For solopreneurs and small business owners, the QBI deduction can be a beneficial way to reduce your tax liability. It’s essential to stay informed, understand the nuances, and consult with a tax professional to ensure you’re maximizing this opportunity while staying compliant with IRS guidelines.