As a business owner, protecting your financial interests is tantamount to the continued success of both your professional and personal financial pictures. Understanding the various tax breaks available to you and how they impact your finances is a vital element of this.
A QBI deduction is one such tax break that offers significant savings for qualified business owners. These have been available since 2018, but there remain some significant questions about who actually qualifies and how it works. We want to help clarify some of the scrutiny and allow California business owners to take advantage of this savings opportunity.
What is a QBI Tax Deduction?
A QBI deduction provides a pass-through income tax write-off of up to 20% of income for business owners. This applies before calculating your taxable income, allowing you to save on income taxes for that year.
There are limits, however. In FY2023, the QBI deduction limit for the taxable income of single taxpayers is $182,100 or $364,200 for married couples. It’s important to understand these limits at the time of implementation as they evolve each year.
Who is Eligible?
Owners of single-member LLCs, S corporations, partnerships, and sole proprietorships, as well as certain beneficial owners of trusts and estates that earn income, are eligible. Dividends from a real estate investment trust (REIT) and income from publicly traded partnerships (PTP) are also eligible.
Owners of C corporations are not eligible as they pay corporate income taxes, meaning there is no pass-through income to qualify for a QBI deduction. Income that does not qualify includes earnings from a W-2, income generated from businesses outside the United States, capital gains or losses, and annuities earned from something other than a business.
How Much Can You Deduct?
Calculating your QBI deduction in most cases is determining the lesser of the two following totals:
1. 20% of QBI and qualified REIT dividends and PTP Income
2. 20% of taxable income minus net capital gains
Whichever of those two numbers is lower is the proper deduction amount you are eligible for as a qualifying business owner. However, these calculations require additional layers for those with high-income thresholds and those who earn a significant amount of income from self-employment.
Furthermore, it is important to note that the QBI deduction is affected by how much you pay yourself through a salary in your business (if your entity is an S-corporation). There are additional complexities that must be considered when choosing which type of entity to form. It’s important to work with a tax attorney who understands the landscape of California businesses to ensure you qualify and are claiming the proper amount. This article is only a small portion of what’s been an often confusing and even frustrating deduction implementation by the IRS. Contact Dahl Law Group to verify your eligibility and claim this deduction properly.
Dahl Law Group
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