The 2017 Tax Cuts and Jobs Act (TCJA) created a 20% federal tax deduction for many self-employed taxpayers and small business owners (i.e., not wage earners but those with business income). This is called the Qualified Business Income (QBI) deduction which applies to income derived from “pass-through entities”—businesses whose earnings are reported on individual owners’ tax returns rather than corporate returns. If you are a sole proprietor, partner, LLC owner, or shareholder in an S corporation, you may be eligible to claim the deduction.
The IRS defines QBI as “the net amount of income, gain, deduction and loss from any qualified trade or business including income from partnerships, S corporations, and certain trusts.” QBI is reduced for typical deductions for a business (self- employment tax, self-employment health insurance, deductions for retirement plans, etc..). QBI does NOT include capital gains or losses or dividends. Rental real estate enterprises are treated as a trade or business for QBI deduction purposes.
If you qualify, you may be able to deduct a portion of your business earnings from your adjusted gross income (AGI) on your tax forms. Because the QBI deduction reduces your taxable income, it may result in significant tax savings.
If your income is less than $315,00 (MFJ) or $157,500 (all other taxpayers) then you may be eligible for the full 20% tax deduction on your qualified business income. The deduction is still available for incomes above that but gradually reduce with income and phase out completely at QBI over $415,000 (MJF) and $207,500 (all other taxpayers). The 20% QBI deduction is available whether you itemize deductions on Schedule A or take the standard deduction.
At the high-income levels above the thresholds the nature of the business matters. If your business is NOT one of the following fields you may still be eligible for the deduction even above the high-income thresholds: health, law, accounting, actuarial science performing arts, consulting, athletics, financial services, investing and investment management, trading.
This is a great tax savings for those who are start/operate a small business this year. There are many other tax incentives for small business owners. If you an employee/wage earner now is a good time from a tax reduction point of view to consider a side small business to see if it works for you.