The best cheat sheet to understanding 199A QBI Deduction

KEY DEADLINES:

March 15 – Partnership & S-Corp Tax Deadline

April 15 – Individual & C-CorpTax Deadline

 

In life, you deal with the good and the bad.

Deciding to run your own business isn’t any different. There are a lot of positives, but in the same breath, there are trade-offs.

You have more freedom, but more responsibility. You reap all the rewards, but also the failures. You have the chance to fulfill your life’s passion but the long hours making it a reality is unavoidable.

The same can be said about taxes. There are certain taxes that only apply to entrepreneurs but, there are special deductions that exist too.

Take the 199A Qualified Business Income (QBI) Deduction for example. You might have seen me go on Facebook live last week explaining a little bit more about it. If you’re someone that would rather watch a video than read a post, check it out.

Anyway, the 199A QBI Deduction allows taxpayers a deduction of 20% of qualified business income earned in a qualified trade or business (not C-corporations). And did I mention it is eligible to taxpayers whether you itemize or take a standard deduction? Yes, girl!

In the simplest terms – you have the chance to reduce your taxable income by 20%. So yeah, it’s a pretty big deal if you ask me. If you run your business as a sole proprietor, LLC partnership, S corporation, (some) rental property,  trust, and estates it’s definitely worth looking in to.  

But of course, there’s a catch. Okay…maybe a few.

The deduction is 100% available to taxpayers whose 2018 taxable incomes fall below $157,500 or $315,000 for joint returns. Now if you’re bringing in the bank, the QBI deduction doesn’t totally vanish (for some).  The tax deduction just gets…complicated.

Above, I emphasized the QBI deduction doesn’t totally go away “for some”.  If your income is over the threshold amounts mentioned above AND you are in the business of providing a service — then, unfortunately, the QBI deduction becomes limited until it completely is eliminated when taxable income exceeds $207,500 or $415,000 if married.  If the QBI limits affect you, don’t be sad — pat yourself on the back and keep getting that paper! 💸

You may be asking, “what exactly is a service provider?”  The IRS labels service businesses as “specified service trades or businesses (SSTBs),”. This includes doctors, lawyers, accountants, consultants, artists, creatives and really, most of anyone who provides a service.  On the contrary, a business can sell products (and not a service) or even be a combination of both i.e. a business who provides tennis lessons (service) and sells tennis balls (product).

Lastly, landlords, there are certain restrictions apply to your rental properties. Namely, you have to log at least 250 hours of rental services a year among other restrictions. The IRS regulations are pretty grey when it comes to rental property but check out the proposed IRS additional guidelines for more info on the matter.

This whole 199A QBI topic is a new tax deduction (this is the first year people can claim it (2018 – 2025 tax years) so make sure to ask your accountant to consider it when you file your taxes.  

And if you aren’t currently working with a tax professional but have determined that QBI effects you, then get yourself an accountant…yesterday. The peace of mind you will gain by having a tax expert on your side is priceless.  

 

With love,

 

Chika

 

P.S. KEY DEADLINES:

 

March 15 – Partnership & S-Corp Tax Deadline

April 15 – Individual & C-CorpTax Deadline

 

P.P.S. Don’t want to miss the next time I go live? Make sure to join my poppin’ FB group Chika’s Tax Tips. It’s LIT. Get freebies, your pressing questions answered and connect with other entrepreneurs. Oh, and follow me on Instagram @chikaobihcpa. Just cause 😉

 

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