What is the Qualified Business Income Deduction

The Qualified Business Income (QBI) tax deduction is a tax benefit available under the Tax Cuts and Jobs Act (TCJA), which went into effect in 2018. It allows owners of pass-through businesses (such as sole proprietorships, partnerships, S-corporations, and some LLCs) to deduct up to 20% of their qualified business income on their personal income taxes.

Here’s how it works:

1. Qualified Business Income (QBI)

• QBI refers to the net income generated by a pass-through business, excluding items like capital gains, dividends, and interest income.
•  
• For a business to be eligible, it must be a pass-through entity (meaning it does not pay taxes directly; instead, the income is passed to the owners, who then report it on their personal tax returns).

2. Eligible Businesses

• Most small businesses, including sole proprietors, partnerships, S-corporations, and LLCs that are taxed as pass-through entities, are eligible for the deduction.

• Specified Service Trade or Businesses (SSTBs): Certain businesses in fields like health, law, accounting, consulting, financial services, and performing arts are subject to limitations on the deduction. However, if the business owner’s taxable income is below a certain threshold, they can still qualify for the deduction.

3. Deduction Amount

• Up to 20% of QBI is deductible.
•  
• The deduction is limited by the taxpayer’s taxable income. If taxable income exceeds certain thresholds, additional limitations based on wages paid and the value of tangible property used in the business may apply.

As of 2023, the taxable income thresholds are:

• Single filers: $182,100 (phased out between $182,100 and $232,100).
•  
• Married, filing jointly: $364,200 (phased out between $364,200 and $464,200).

If your taxable income exceeds these thresholds and you own a specified service trade or business, your ability to claim the QBI deduction may be reduced or eliminated.

4. Wage and Capital Limitations

• For higher-income taxpayers, the deduction may be limited based on the amount of wages paid to employees and the amount of depreciable property used in the business.
•  
• Specifically, the deduction cannot exceed the greater of:
•  
  • 50% of W-2 wages paid by the business.
  •  
  • 25% of W-2 wages plus 2.5% of the unadjusted basis of qualified property.

4. How to Claim the Deduction

• The QBI deduction is claimed on Form 1040. For businesses, the income or loss is reported on Schedule C (for sole proprietors), Schedule E (for partnerships and S-corporations), or Form 1065 (for partnerships).
•  
• For S-corporations and partnerships, the deduction flows through to the individual owner’s tax return.

5. Impact on Taxes

• The QBI deduction reduces the amount of taxable income, which, in turn, reduces the overall tax liability.
•  
• It is a deduction, not a credit, so it lowers the taxable income and the amount of income subject to federal income tax.

Example

• Suppose you are a sole proprietor with a taxable income of $100,000 and you have $80,000 of QBI.
•  
• You may be eligible to deduct up to 20% of $80,000, or $16,000, from your taxable income.
•  
• This results in a reduced taxable income of $84,000 ($100,000 – $16,000), which could reduce your overall tax liability.

Key Considerations

• The deduction only applies to income from the business; it does not apply to other types of income, such as capital gains or rental income.
•  
• The QBI deduction can interact with other deductions and credits, which means careful tax planning may be required to maximize the benefit.
•  
• It is important to track your business income carefully to ensure eligibility and correct calculation of the deduction.

In summary, the QBI deduction is a valuable tool for owners of pass-through businesses to reduce their taxable income and lower their federal income taxes. However, the eligibility and amount of the deduction can vary based on the type of business, the owner’s income, and other factors.

About TaliMar Financial 

TaliMar Income Fund I offers investors the ability to participate in the rapidly growing demand for private real estate debt. The fund is comprised of a diversified portfolio of short-term loans secured primarily on residential single family and multi-family properties throughout California. The fund manager, TaliMar Financial, was established in 2008 and has successfully funded over $500 million in loans.  Investors in the mortgage fund include high net worth investors, family offices, and private equity funds who are seeking consistent monthly income, the security of real estate, and the tax benefits of a mortgage fund structured as a real estate investor trust. 

Disclosure: This advertisement is for informational purposes only and does not constitute an offer to sell nor a solicitation of an offer to buy any security. Such offers can only be made by the Private Placement Memorandum (“PPM”) and related subscription documents. Any investment in TaliMar Income Fund I involves significant risk. You should not enter into any transactions unless you fully understand all such risks and have independently determined that such transactions are appropriate for you. Business Purpose Loans arranged through TaliMar Income Fund I, LLC (DFPI CFL License No. 60DBO-137778).