There is a federal 20% deduction on qualified business income available in 2018. Qualifying for this deduction will depend on the type of business you have and your individual taxable income before the deduction. Taxpayers with taxable income over $157,500 ($315,000 married filing jointly) are subject to additional limitations on this deduction. Businesses in the service industry where the principal asset is the reputation or skill of one or more of its employees will have even greater limitations on this deduction.
Here are some basic examples to see if you qualify:
Specified Service Businesses
Fact: Individual taxable income under $157,500 single or $315,000 Married Filing Joint (MFJ)
Result: Deduction equal to lower of 20% of qualified business income (QBI) or 20% of individual taxable income.
Fact: Individual taxable income between $157,501-$207,500 ($315,001-$415,000 MFJ)
Result: Deduction limited
Fact: Individual taxable income over $207,500 ($415,000 MFJ)
Result: No Deduction
Non-Specified Service Businesses
Fact: Individual taxable income under $157,500 single or $315,000 Married Filing Joint (MFJ)
Result: Deduction equal to lower of 20% of qualified business income (QBI) or 20% of individual taxable income.
Fact: Individual taxable income between $157,501-$207,500 ($315,001-$415,000 MFJ)
Result: Deduction equal to lower of 20% of qualified business income (QBI) or 20% of individual taxable income. Subject to wages and assets limitations.
Fact: Individual taxable income over $207,500 ($415,000 MFJ)
Result: Deduction equal to lower of 20% of qualified business income (QBI) or 20% of individual taxable income. Subject to wages and assets limitations.
Qualifying for this deduction could change your federal tax liability dramatically and there is a delicate balance between qualified business income and taxable income that must be considered. If you are a taxpayer that expects taxable income near the phaseout range ($157,500 single or $315,000 MFJ) it might be time to contact your tax advisor to determine how best to take advantage of this deduction.
