Back in 2019, we gave an in-depth look at the section 199A qualified business income deduction. Now that we are in the year 2022 it would be a good chance to look at what has changed since then. If you haven’t already read our previous article, we urge you to read it before continuing by clicking the link here.
What is qualified business income?
Qualified business income (QBI) is the total amount of a pass-through entity or sole proprietor’s taxable income sourced within the United States. This applies to all income except for items such as the following:
- Employee wages or salaries
- Nontaxable income, like municipal bond interest
- Capital gains (losses)
- Investment income, such as capital gains or losses, or dividends
- Income from foreign sources
- Publicly traded partnership (PTP) income
- Interest income not allocable to a trade or business
It is important to note that any business income not sourced within the United States does not qualify as QBI.
What is the QBI deduction?
The QBI deduction is a deduction for tax years beginning after December 31, 2017. The deduction allows eligible taxpayers to deduct up to 20% of their QBI, plus 20% of qualified real estate investment trust (REIT) dividends as well as their qualified publicly traded partnership (PTP) income. The deduction is available to taxpayers whether they itemize deductions or take the standard deduction.
Who qualifies for the QBI Deduction?
Pass-through entities (PTE) such as sole proprietorships, partnerships, LLCs, or S corporations are eligible for a QBI deduction, provided they are within the income thresholds. The table below shows the 2022 QBI deduction taxable income thresholds:
|Filing Status||Income threshold (Full deduction)||Income threshold (Partial deduction)|
|Head of Household (HOH)||$164,900||$214,900|
|Married Filing Jointly (MFJ)||$329,800||$429,800|
|Married Filing Separately (MFS)||$164,925||$214,925|
|Married nonresident alien||$164,900||$214,900|
If you exceed the income threshold, you are no longer able to obtain the full deduction, and your maximum deduction will be decreased until you no longer qualify. In the case of a specified service trade or business (SSTB), you will not qualify for a deduction if you surpass the income threshold above. SSTBs include the following:
- Actuarial science
- Investing and investment management
- Performing arts
- Dealing in securities, partnership interest, or commodities
- Any business whose principal asset is the reputation or skill of one or more of its employees or owners
If you have further questions regarding your business’s status as an SSTB, please reach out to us.
How is the deduction claimed?
For tax years 2019 and after, Form 8995 or 8995-A are used to report all QBI deductions. This form must be attached to the taxpayer’s return upon submission. On this form the taxpayer must report the name of their trade, business, or aggregation and all identifying information, as well as the total qualified business income of your business. This form acts as a worksheet to compute your QBI deduction.
How is the deduction calculated?
Calculating the QBI deduction is the same as in previous years it was available. If your taxable income is less than the income threshold above for your filing status, and you are a pass-through entity, you can claim up to the full deduction. For example, if you own a sole proprietorship, your filing status was unmarried filing jointly, you had $150,000 of taxable income before deductions, and $120,000 of taxable income after deductions, you would be able to claim the full deduction since you did not exceed the threshold. You would multiply the lesser of the two values, in this case $120,000, by 20%. Your QBI deduction is $24,000.
If the taxable income of your business exceeded the threshold listed above, your qualified business income from an eligible business will be limited to the lesser of:
- 20% of the taxpayer’s qualified business income with respect to a qualified trade or business, and
- The greater of
- 50% of the W-2 wages with respect to the qualified trade or business, and
- The sum of 25% of the W-2 wages with respect to the trade or business plus 2.5% of the unadjusted basis immediately after acquisition of all qualified property.
If you need any assistance with qualified business income deduction, please don’t hesitate to reach out to us at Lear & Pannepacker. You may be able to save thousands of dollars this tax season.