Does Your Business Qualify for the 20% Small Business Tax Break This Year?
As a small business owner, the amount you owe during tax season can be a surprise if you’ve had a year of excellent growth or you don’t take all of the deductions available to you.
This year, one of the most important variables on taxable income for small business owners is the 20% deduction on qualified business income (QBI).
What is the 20% QBI tax break?
The QBI deduction, which went into effect in 2017 as part of Congress’ Tax Cuts and Jobs Act, enables owners of pass-through businesses to deduct up to 20 percent of their qualified business income. This includes business owners who:
- Receive income from pass-through businesses, including sole proprietorships, S-corporations, partnerships, and LLCs.
- Earn less than $157,000 and are filing under single status.
- Earn less than $315,000 and file jointly.
It’s a broad-sweeping tax break that benefits business owners ranging from operators of corner stores to hairdressers to financial advisors. Ultimately, this deduction levels the playing field for small business owners by providing them with similar tax benefits already enjoyed by C-Corporations and high-earning individuals.
The baseline qualifications for taking the tax break are simple. However, if you run multiple lines of business or offer related trades, applying the tax break might be a more convoluted step when it comes time to file. Major factors that can impact how much of a deduction you can claim include:
- Your adjusted income exceeds the limit. Once your qualified income exceeds the amounts listed above, your ability to take the deduction is determined by the total amount of employee wages your business pays and/or other capital earned.
- You run a trade-based business: The IRS limits the use of the deduction for service-specific trade businesses, including specialists such as doctors, lawyers, financial advisors, engineers, architects, accountants, and performers. If your business is based around a specific skill, the deduction becomes much harder to use once your income exceeds $207,500 if single (or $415,000 if filing jointly).
- You generate income from multiple businesses. This provision prevents business owners from reducing their total taxable income by splitting off different parts of their business and qualifying each one for the deduction.
Maximizing the QBI Deduction
Despite these limitations, small business owners have a leg up this year by taking the QBI tax break. You can help ensure that you meet the necessary guidelines for applying the deduction by doing the following:
- Consider combining businesses when filing: The new rules do allow small business owners to combine multiple businesses to get a bigger tax break.
- Contribute to retirement or charity funds: Reduce your total taxable income to qualify by making contributions to your retirement plan or a charity, even if you don’t itemize.
- Project future business needs. It’s worth crunching the numbers to see how incorporating into a C-Corp or spinning off different parts of your business will impact your eligibility for the QBI deduction.
We know that you’d rather be running your customer service than researching the ins and outs of new tax regulations. Whether this is your first year in business or you need to adjust your typical filing method to take this deduction, understanding how to leverage the 20% deduction to ease your 2019 tax burden is a must-do for small business owners’ bottom lines.
Learn more about taking the QBI deduction: