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How to qualify for the QBI deduction and year-end strategies to maximize this deduction

As a business owner, you may have heard others mention QBI, Section 199A, or the pass-through deduction. These are all common ways to refer to the qualified business income (QBI) deduction.

What is the QBI deduction and are you eligible to claim it?

The QBI deduction is available to taxpayers, other than corporations, and could allow a deduction of up to 20% of their QBI (qualified business income). This includes sole proprietorships, single member LLCs, partnerships, S-corporations, trusts, and estates. The deduction is a pass-through deduction, meaning the benefits flow through to the owner’s return – i.e., the one who pays the tax.

The QBI deduction is available regardless of whether you itemize or take the standard deduction. It reduces taxable income directly, as opposed to just reducing your adjusted gross income. The overall purpose of the QBI deduction is to decrease the tax on qualified business income such that the “net rate” is more in line with the corporate tax rate.

In some instances, the 20% deduction may be limited because taxable income is too high. For 2022, if taxable income exceeds $170,050 for single taxpayers or $340,100 for married filing jointly, the QBI deduction may be limited. These limits are increased to $182,100 and $364,200, respectively for 2023. If limited, other factors weighing into the limitation include whether the business is a service type of business, the amount of W-2 wages paid by the trade or business, and/or the unadjusted basis of qualified property held by the trade or business.

Year-end strategies for maximizing

If you are worried about the deduction being limited, year-end might be a good time to strategize how to maximize the QBI deduction. This could include deferring income, accelerating deductions, or increasing W-2 wages. The rules surrounding the QBI deduction can be quite complex, and the deductibility depends on many different factors unique to your tax return and business. Please contact Wegner CPAs to discuss how this could be maximized under your circumstances.

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