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The Qualified Business Income Deduction

The Qualified Business Income Deduction Defined- An individual taxpayer who is also a small business owner may deduct up to 20% of qualified business income from a partnership, S corporation, or sole proprietorship on his or her personal income tax return. The tax code defines the term qualified business income (QBI) as the net amount of items of income, gain, deduction, and loss with respect to any qualified trade or business (essentially, the net income). A qualified trade or business includes any business other than a “specified service trade or business”, or performing services as an employee.

Specified service trade or business- A specified service trade or business is any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees. Specified trades or businesses include those that involve performance of services in the fields; of health, law, engineering, accounting, architecture, actuarial science, performing arts, consulting, athletics, financial services, and brokerage services, including investing and investment management, trading, or dealing in securities, partnership interests, or commodities. Despite the list, not all service businesses are prohibited, just those businesses that create income by providing reputation based professional services.

Income Limitations and the Specified Service Trade or business Exception- A taxpayer whose income exceeds $157,000.00 (single/HOH) or $315,000.00 (MFJ) deduction is limited to the greater of:

  • 50% of W-2 wages paid with respect to a qualified trade or business, or

  • The sum of 25% of W-2 wages plus 2.5% of the unadjusted basis of all qualified property held by the trade or business (for real estate businesses).

However, if the business is a specified service business, the deduction is disallowed once the income limitations mentioned above are reached.

If you think that the information above applies to you, it is imperative that you discuss this with your tax professional. For more information, please feel free to contact our office.

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