If you’re a self-employed or small-business owner, you may be eligible for the qualified business income (QBI) deduction. This tax deduction allows you to deduct up to 20% of your qualified business income from your taxable income. In this article, we will discuss the QBI deduction and how to maximize its benefits.
What is the QBI Deduction?
QBI stands for qualified business income. It is the net amount of income, gain, deduction, and loss from any trade or business that you operate as a sole proprietorship, partnership, S corporation, LLC, or trust. It includes income from services, property, royalties, rents, interest, dividends, and more. QBI does not include income that is not effectively connected with the conduct of your trade or business within the United States. For example, if you work as a freelance writer in California and earn money from clients in New York, that income is not QBI and cannot be deducted.
Who Qualifies for the QBI Deduction?
To qualify for the QBI deduction, you must meet two main requirements:
- You must have pass-through income. This means that your income is reported on your personal tax return and not on the tax return of your business entity.
- You must have taxable income below certain thresholds. These thresholds vary depending on your filing status and the year. For 2022, the thresholds are $170,050 for single filers and $340,100 for joint filers. For 2023, they are $182,100 for single filers and $364,200 for joint filers. If your taxable income exceeds these thresholds, you may still qualify for the QBI deduction if your pass-through income meets certain criteria. These criteria depend on the type of trade or business you have and whether it is subject to any special rules or limitations.
How to Claim the QBI Deduction?
To claim the QBI deduction, you need to fill out Form 8995-A or Form 8995, depending on whether you are eligible for the deduction under Section 199A or Section 199A (b). You also need to attach Schedule C or Schedule C-EZ, depending on whether your business entity has gross receipts of $25 million or less. You can claim the QBI deduction either on Schedule A or Schedule A-C, depending on whether you itemize your deductions or take the standard deduction. The maximum amount of QBI that you can deduct is 20% of your qualified business income plus 20% of qualified REIT dividends and qualified PTP income (if applicable).
Tips to Maximize the QBI Deduction
To maximize the benefits of the QBI deduction, you should consider the following tips:
- Keep accurate records of your business income and expenses.
- Consult with a tax professional to ensure that you are taking advantage of all available deductions and credits.
- Consider incorporating your business to take advantage of additional tax benefits.
- Make sure that you are using the correct tax forms and filing deadlines.
- Stay up-to-date with changes to the tax code that may affect your business .
Robert Hall & Associates
If you need help with your taxes, consider availing tax services from Robert Hall & Associates. We have been providing tax services to individuals and businesses for over 50 years. Their team of experienced tax professionals can help you with tax planning, preparation, and filing. Contact us today to learn more.
