Understanding Your Qualified Business Income Deduction
In 2017, the Tax Cuts and Jobs Act introduced a new set of deductions that local business owners can take advantage of. And if you qualify, you can receive a 20% deduction from your QBI. While we may still be a few months away from tax season, it’s important for those with businesses to get a jump start on preparing their filings. After all, business taxes can be some of the most difficult to handle. So, to get you started, here’s how you can prepare for your QBI deduction.
Qualified Business Income
Are you not familiar with the term Qualified Business Income (QBI)? Per the definition provided by the IRS, your QBI is “the net amount of qualified items of income, gain, deduction and loss from any qualified trade or business.” In other words, your QBI is your total profit for the year, based on what you both made and spent.
Before you begin to apply for your QBI deduction, you must first make sure you are eligible. Firstly, your business must be a “pass-through” business. For business owners, this means all income for your business “passes through” to your individual or joint tax return, making it subject to the typical personal income tax rates. Most small businesses are considered pass-through businesses, in addition to S corporations, sole proprietors, partnerships and LLCs.
Other Qualifying Factors
Aside from how the IRS labels your business, there are other contributing factors to being eligible for a QBI deduction. Listed below are some of the primary qualifications for receiving this relatively new deduction:
- All your taxable income is from inside the U.S.
- Combined QBI and personal income must be below $160,700 for individuals
- Combined QBI and personal income must be below $321,400 for married couples
- If you are a Specified Service Business, you may not receive full deductions if over the set limits
A Basic Rundown of What You Can Save
Once you’re sure you meet all the qualifications for a QBI deduction, the professionals at White Income Tax can assist with your filing. Moreover, if you want an idea of what can be saved under the QBI deduction, here is an example:
Let’s assume you run a small business from your home, selling unique furniture items you build yourself. After calculating the total amount your business made from sales, minus expenses for materials, tools, delivery methods, maintenance, etc., your net profit comes to $40,000. In addition to your small business, you do some part-time work on the side, totaling $25,000. Combined, your total income for one year is $65,000, well below the $160,700 limit. Your QBI would then take your business profits ($40,000) and deduct 20% ($8,000) from your total taxable income. So, your total amount of taxable income for that year amounts to $57,000.
Don’t Forget About Your Other Deductions
While the QBI deduction is an incredible boon to any new and small business owner, don’t forget your other standard personal and business deductions. Overall, you’ll want to make sure you choose the right deductions that reduce your taxable income by the most. However, knowing what all of that is for a business isn’t always easy. So, to ensure you maximize your deductions and get a better tax return for the upcoming year, hire the services of White Income Tax.
At White Income Tax, Dianna White handles tax filings for big businesses, small businesses, individuals and families alike. As a client, you will receive personalized attention that is tailored to your needs. From preparing for taxes to providing payroll services and more, we are the experienced accountant locals throughout Peoria and Bartonville rely on.
To better understand your qualified business income deduction, or to learn more about the services of White Income Tax, call our office today at (309) 326-5973. Also, we are located at 431 N Western Ave, Peoria, IL 61606.