3

In the USA, the new tax laws include a:

Qualified Business Income Deduction

I cannot find one place that explains this and whether it is good or bad.

Example situation:

Married person, with an LLC. Gross of the business = $400,000, costs of the business == $220,000. The business has no employees.

Before this new QBID, you made $180,000 and proceeded from there.

How does the new QBID affect this?

Does it mean you only deduct 20%, not the 200k? Or does it mean you deduct an additional "bonus" 20k from the 180k result? {Seems incredibly hard to believe!}

  • 1
    I have suggested an edit to focus the question on the information you seek. Feel free to shoot it down if you feel it alters the question in an undesirables way. – GOATNine Jul 26 '18 at 19:38
  • 1
    I also tried to clarify - surprising there aren't more questions about this huge change to tax in US?? – Fattie Jul 30 '18 at 11:39
  • huge bounty here ! – Fattie Aug 3 '18 at 13:09
3
+250

The Qualified Business Income Deduction was enacted in the Tax Cuts and Jobs Act of 2017 which went into effect on 1 Jan 2018. http://uscode.house.gov/statviewer.htm?volume=131&page=2054

If you earn income from qualified business (only applies to defined pass-through businesses - such as LLCs, S corporations, partnerships and sole proprietorships), and that business has a taxable income below $157.5K (singles) or $315K (married filing jointly) then you qualify for an additional deduction of 20%.

There is a somewhat complex phase-out of the the deduction above these levels, using the W-2 Limit. There are quite different outcomes for a Sole Proprietor (including single member LLCs), S-Corp (with wages paid) and Partnerships (including multiple member LLCs). there are further differences if the business a "specified trade or business" or a "non-specified trade or business". Specified business include accounting, brokerage services, consulting, financial services health and law services.

In your example, which is below the thresholds, it's 20% of $180K or an additional $36K worth of deductions, reducing your business income to $144K. At 24% tax rate, this is effectively worth $8.64K to you.

This is designed to assist small business owners and help them expand their business by employing more people, but can of course go into your own pocket if you desire.

It's also clear that this Tax Act introduces some quite significant choices for the choice of which business entity to use when the income exceeds the thresholds (157.5K singles, 315K joint).

Disclaimer: This an opinion only. You should seek professional advice for tax matters, especially for a business, given the changing landscape of tax matters in general.

  • 1
    Thanks - Ah - wait, isn't there something where you only get that gift if you have employees .. perhaps I'm mistaken? – Fattie Jul 30 '18 at 15:09
  • 1
    I wouldn't use the term "gift" - it's a deduction until 2025. Above the threshold, the W-2 limit is the part that incorporates wages paid to you (single) or to both of you (joint filing). There are a number of worked examples of high and low incomes, specified and non-specified business available, incorporating wages paid. It's probably easiest to look through their world examples to see: journalofaccountancy.com/issues/2018/may/… – Norgate Data Jul 30 '18 at 23:41
  • Ah that "wages limitation" only applies if you are above the 157/315 taxable income level ......... I get it. Cheers – Fattie Aug 3 '18 at 13:09

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .