The qualified business income deduction (QBI), also known as Section 199A, was introduced in the 2017 Tax Cuts and Jobs Act and allows business owners to take a 20% deduction on qualified business income from a “pass through” business. The deduction is phased out for certain high-income earners (income greater than $157,000 for single filers and $315,000 for joint filers). Taxpayers in this scenario can apply the following tax planning techniques to maximize the QBI deduction.
- Taxable income is above the applicable threshold – It may be a good idea to defer income or accelerate expenses that create business deductions for the current year. Either method will effectively lower your taxable income allowing you to take a larger QBI deduction. See our Year End Tax Tips for ways to defer income and accelerate expenses.
- Special Service Trade or Business Phase-Out – Since the QBI deduction applies separately to each business, it may make sense to start a separate business or entity to spread out the deduction. As with all tax planning strategies, only do so if there is a legitimate reason as the IRS has rules governing such strategies.
- Limited by the 20% taxable income threshold – You can increase your QBI deduction by increasing your taxable income. Consider accelerating the receipt of income to this year or working a second job to add additional income. Be mindful of your tax bracket. Increasing income may bump you into a higher tax bracket.
- Limited by the wage/depreciable property limits – Consider switching independent contractors (1099 workers) to W-2 employees or hire additional W-2 employees as needed. This technique is beneficial if the benefit of the increased deduction outweighs the marginal payroll taxes associated with hiring an additional employee.
Although these are great strategies for maximizing the QBI deduction, you should always contact a tax professional to discuss your specific situation and the potential effects of taking on such strategies.
If you have questions or would like help calculating your deduction, please email us at firstname.lastname@example.org or call us at (347) 201-2045.