One of the more significant and complicated changes from the Tax Cuts and Jobs Act (TCJA) is the new tax deduction for pass-through entities. Those who qualify can deduct up to 20% of their qualified business income (QBI), and this deduction is known as the qualified business income deduction (QBID).
QBID is limited by the taxpayer’s taxable income, and it is further limited or phased out for specified service businesses.
A Specified Service Business (SSB) DOES NOT QUALIFY FOR QBID unless their taxable income falls below certain thresholds. Please see the tables below for further details.
SSBs are any trade or business involving the performance of services in the following fields:
- Actuarial Science
- Performing Arts
- Financial Services
- Brokerage Services
- Investing or Investment Management
Engineers, real estate brokers/agents, insurance agents, and architects are not considered SSBs.
Income from the following entities (as long as it is not an SSB) is eligible for QBID:
- Partnership (including LLCs taxed as a partnership)
- S corporation
- Sole Proprietorship (Sch C)
- Real Estate Investors (Sch E)
- Disregarded entities, including single-member LLC
- Trusts and estates
QBID is limited to 20% of net Qualified Business Income.
Qualified Business Income (QBI) and Exclusion:
Qualified business income is the net amount of domestic business taxable income, gain, deduction, and loss with respect to any qualified trade or business. However, QBI explicitly excludes some types of income, including certain investment-related income, reasonable compensation paid to the taxpayer for services rendered concerning the trade or business, and guaranteed payments.
Income Thresholds and Phase-out ranges for non-SSB and SSB:
Married Filing Joint
|TI < 315,000||20% Deduction||20% Deduction|
|315,000 < TI < 415,000||20% Deduction is reduced by Wage/Capital phase-in amount||20% Deduction is reduced by excess amount|
|415,000 < TI||Wage/Capital Testing||No Deduction|
Non-Married Filing Joint
|TI < 207,500||20% Deduction||20% Deduction|
|157,500 < TI < 207,500||20% Deduction is reduced by Wage/Capital phase-in amount||20% Deduction is reduced by excess amount|
|207,500 < TI||Wage/Capital Testing||No Deduction|
When a non-SSB taxpayer’s income is more than $415,000 for MFJ or $207,500 for non-MFJ, QBID is limited to the lesser of 1) 50% of W-2 wages or 2) 25% of W-2 wages plus 2.5% of the unadjusted basis for all qualified property.
We Are Here to Help
While this is a brief overview of the computation of the QBID, there are a number of variables both at the pass-through entity level and the individual level that must be considered in the computations.
As we enter the upcoming tax season, MGA is here to help you understand the complex changes within the tax legislation. Reach out to your team today for any further questions or concerns that you may have.
We are here to make the complex simple.