Do you own a small business and expect to show positive income on your tax return in 2018?
If so, you may be eligible for the new Qualified Business Income deduction (QBI). The QBI deduction is a 20% deduction for Qualified Business Income generated by a qualified business. However, the deduction may be partially phased out if your taxable income will be above $157,500 if you are single or $315,000 if you are married, filing joint.
When the Tax Cut and Jobs Act reduced the Corporate Tax Rate from 35% to 21%, Congress wanted to provide a tax break to small business owners that did not file as a C Corporation. So naturally, they created a tax break that is very difficult to understand, and you must work with an accountant to determine eligibility.
Basically, the Qualified Business Income (QBI) tax deduction is available to almost any flow-through entity (S-Corp, LLC, LP, GP, and self-employed individuals) that shows positive income on their tax return in 2018. The deduction is equal to the LESSER OF 20% of your Qualified Business Income OR 20% of your taxable income excluding any capital gains. If that sentence is difficult to read, try calculating your net business income and then your taxable income (gross income less above-the-line deductions less below-the-line deductions).
Unfortunately, it only gets more complicated when your taxable income exceeds $157,500 as if filing single or $315,000 if you are married, filing joint. The good news however, is that this deduction is based on your taxable income, which creates several planning opportunities to consider before year-end if you need to reduce your taxable income, especially if you are near the threshold.
Here are a few planning strategies that could reduce your taxable income below these thresholds, if you are subject to them:
- Maximize IRA, 401(k), Solo-401(k), 403(b) or pre-tax 457 plan contributions
- Maximize Profit Sharing plans, if available
- Maximize Cash Balance plan contributions, if available
- If you itemize AND give to charity, consider increasing your charitable contributions (or gift to a Donor Advised Fund for gifting in future years) to increase your itemized deductions
Qualifying for the deduction gets complicated if you find yourself above the phaseouts and we recommend you consult with a Certified Public Account or Tax Attorney. If you would like to discuss your personal situation, please call your Surevest Wealth Advisor.