Pass-through Taxes Help

Pass-through Income

What is the qualified business income deduction (QBI)? The QBI allows eligible self-employed and small-business owners to deduct up to 20% of their qualified business income on their taxes.

How does it work? The qualified business income deduction is for people who have “pass-through income”. That is business income that you report on your personal tax return.

Entities eligible for the qualified business income deduction include:
Sole proprietorship.
Partnerships.
S corporations.
Limited liability companies (LLCs).

You must have qualified business income. The qualified business income deduction by definition applies to “qualified business income,” or QBI. Qualified business income is defined as “the net amount of qualified items of income, gain, deduction and loss with respect to any trade or business.” In other words, that means your business’s net profit. But it also means that not all business income qualifies.

QBI excludes:
Capital gains or losses.
Dividends.
Interest income.
Income earned outside the U.S.
Certain wage and guaranteed payments made to partners and shareholders.

Your level of income matters. If your total taxable income, business income and other income as well, is at or below $157,500 for single filers, then you may qualify for the 20% deduction on your taxable business income.

If your income is above these limits, above those income limits, your ability to claim the pass-through deduction depends on the precise nature of your business. And even if your business qualifies, there’s a chance you won’t enjoy the full 20% tax break, as the qualified business income deduction is phased out for some businesses.

What if you’re over the income limit? Over the $157,500 limit, there are a few tests that determine whether you qualify for the qualified business income deduction. One such test is this: Is your business a “specified service trade or business”?

If you are a doctor, lawyer, consultant, actor, financial planner, among others, then your business is deemed a “specified service trade or business,” and many high earners in these fields will not qualify for the QBI tax break. It goes away once you hit total taxable income of $207,500 if you’re single/

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