The QBI (Qualified Business Income) deduction came about through the recent Tax Cuts and Jobs Act of 2017. The QBI deduction is also referred to as Section 199A of the tax code. Generally, it is available to pass-through entities including S corporations. It is a strictly non-corporate deduction which means that C corporations and employee provided services do not qualify. Certain trusts and estates, however, will qualify for tax years beginning after December 31, 2017. The tax season of 2019 saw this deduction get underway as federal income tax filings for 2018 were processed.
Essentially, the QBI is a deduction that allows business owners to take 20% off of the top of their tax filings in two areas of income generated from business and investment ventures.
• REIT+ PTP
As sole proprietors, partnerships, and S corporations (along with the owners of qualifying trusts and estates) business owners can deduct 20 percent of qualified business income off of their tax filings as well as 20 percent of all real estate investment trust dividends (REIT) combined with qualified publicly traded partnership (PTP) income.
• For the 20% QBI deduction the income-generating business must be domestic.
• According to the IRS, the patron reduction will affect a taxpayer’s QBI deduction if the taxpayer is a patron of an agricultural or horticultural cooperative.
• The QBI is subject to various limitations depending on the taxable income of the taxpayer and the type of trade or business involved.
• The amount of W-2 wages paid by the qualifying business will affect the QBI as will property acquisitions (UBIA) held by the business.
• For the REIT+PTP component, the amount of PTP income that can be deducted depends on the taxpayer’s income and the type of PTP business.
It is important to remember that the IRS will allow the deduction of qualified business income from the lesser of 20% QBI plus REIT/PTP or 20% of the taxpayer’s taxable income minus net capital gains. For more information on how the QBI deduction affects you and your business, contact us. Our knowledgeable staff can quickly assess your needs.