Are you qualified? How the QBI deduction works.

Welcome to fall, the season of back-to-school, bonfires…and business tax deductions. 

Yes, it’s time to get serious about a tax projection for 2019, especially if you own a Specified Service Trade or Business (SSTB). These are sole proprietorships, partnerships, S-corps, trusts and estates “where the principal asset…is the reputation or skill of one or more of its employees or owners.” Think consultants, lawyers, performers, doctors and even financial advisors. 

Under the Tax Cuts and Jobs Act of 2017, business owners can now deduct up to 20 percent of their Qualified Business Income (QBI), otherwise known as “profit”. As we’ve talked about before, this deduction comes with strict conditions for SSTBs. 

(If you own a business that isn’t an SSTB, like a construction company or an engineering firm, the conditions are more lenient. Be grateful for your almost-assured 20 percent Qualified Business Income deduction and skip the rest of this post!) 

For SSTB owners, here’s how the QBI deduction works:

• Is your taxable income under $315,000 (married filing jointly) or $157,000 (individual)? Congrats! You can deduct 20 percent of your qualified business income, which can significantly reduce your total tax bill. 

• Is your taxable income between $315,000 and $415,000 (married filing jointly) or $157,00 and $207,500 (individual)? Partial congrats: You’re headed for a prorated deduction, based on where you land within that income range. The calculations here can get complicated, so make sure you have a trusted advisor and a smart CPA at your side doing the tax projections. 

• Is your taxable income more than $415,000 (married filing jointly) or $207,500 (individual)? Congrats on your high earnings, but you are out of luck. No QBI deduction for you!

If you find yourself within shooting distance of these thresholds, there are two things you can do to lower your taxable income and maximize your QBI deduction. 

1. Make any necessary large business expenditures before the end of the year. Don’t spend without reason, but also don’t wait to make needed purchases that can put your taxable income under the QBI limits. 
   
2. Give generously! Make a donation to your favorite nonprofit or use a donor-advised fund if you’d rather disperse gifts over time. 

Finally, don’t go at it alone. Tax projections can be stressful and confusing, and no one wants to be surprised come spring. Find yourself a solid CPA and bring in a financial advisor to help you get the big picture in focus.

Let us know how we can help simplify your tax planning process!

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