Section 199A of the Internal Revenue Code provides owners of sole proprietorships, partnerships, S corporations and LLCs, as well as some trusts and estates, a deduction of up to 20% of income from a qualified trade or business, qualified real estate investment trust, and/or qualified publicly traded partnership.
Businesses must be domestic or located within and taxed by the U.S. The deduction is currently available through 2025. Many small business-owner associations are lobbying Congress to make it permanent.
Using the Deduction
The deduction is available if you have pass-through income from a U.S. trade or business. Pass-through income is reported on personal tax returns rather than on the tax return for the corporation.
The deduction applies only to qualified business income (QBI), which is the net amount of income, loss, gain and deduction for a qualified domestic trade or business. Broadly speaking, it is your business’ net profit.
However, investment income, wages, and guaranteed payments to partners are excluded from QBI.
The amount of the deduction varies according to the taxpayer’s income. If your business is a specified service trade or business (SSTB), such as health, law,
consulting, accounting, performing arts or athletics, it is likely that your income is too high to qualify for the tax break.
Assessing the Deduction Amount
The full deduction of 20% is available in 2024 if one of the following applies:
- You are single with a taxable income of less than $191,950.
- You are married filing jointly with a taxable income of less than $383,900.
If your income exceeds these levels, the deduction starts to be reduced.
If you have a non-SSTB, the QBI deduction is limited to the lesser of:
- 20% of QBI
- The greater of either:
- 50% of W-2 wages paid by the business
- 25% of W-2 wages plus 2.5% of the unadjusted basis immediately after acquisition of qualified property
If you have an SSTB and are a single filer, the deduction begins to phase out at $191,950 and phases out completely at $241,950. If you are married filing jointly, the numbers are $383,900 and $483,900, respectively. However, the precise nature of your business may affect the deduction you are able to take.
Further Considerations
QBI generally includes expenses necessary to run a business, for example, rent, supplies, insurance), employee wages and benefits, self-employment expenses (such as health insurance premiums, contributions to retirement plans, and half of the self-employment tax), depreciation of qualified property (such as machinery, buildings, equipment), and direct business deductions (including professional fees, travel expenses, marketing). However, QBI excludes capital gains or losses, dividends, interest income, income earned outside the U.S., and certain wage and guaranteed payments made to partners and shareholders.
The higher these figures, the better your chances of being able to qualify for the QBI deduction (QBID).
When filing your taxes, it is important to note the following:
- The QBID may be up to 20% of your taxable business income, but it cannot be more than 20% of your total taxable income.
- You may use the QBID if you take the standard deduction.
The deduction is considered a valuable tax benefit for small business owners. These generally include sole proprietors who file Schedule C, real estate investors who file Schedule E, farmers and ranchers who file Schedule F, as well as individuals with business income from a partnership, S corporation, trust or estate who receive a Schedule K-1.
Consult with one of our tax professionals to determine your eligibility and claim the deduction correctly.