By Narender Singh With the 20 percent pass-through deduction, noncorporate taxpayers may deduct up to 20 percent of domestic qualified business income (QBI) from a:
There is a limitation based on wages paid, or on wages paid plus a capital element. The deduction is not allowed for certain service trades or businesses, but some business owners in these trades may still qualify if their income is below a certain level. The deduction applies to tax years 2018 through 2025.
The new pass-through tax law's 20 percent deduction on qualified business income is subject to limitations, so it is not available to every entrepreneur. In general, to qualify for the full deduction, your taxable income must be:
The 20 percent deduction is considered a "between the lines" deduction. This means it doesn't lower your adjusted gross income, and you don't have to itemize on your taxes to take it. Generally, if you qualify for the deduction, the 20 percent break will apply to the lesser of:
For example, let’s look at a qualifying small business owner named Jennifer. Jennifer is a joint filer with a Schedule C business. Her standard deduction is $24,000. Her other business financials include:
Business Gross Income | $130,000 |
Business Expenses | $30,000 |
Net profit from business (QBI) | $100,000 |
Spouse’s income | $70,000 |
Above the line deductions for:
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Jennifer’s taxable income before applying the pass-through deduction is $118,500. In this case, her qualified business income of $100,000 is less than her taxable income of $118,500. The 20% pass-through benefit will apply to the qualified business income, and so Jennifer can claim a $20,000 deduction. Jennifer and her spouse are in the 22 percent tax bracket, so they get to save about $4,400 in federal taxes.
Certain small business owners should consider doing some tax planning to optimize the 20 percent deduction. There are some key savings opportunities that benefit some small business owners, including:
Consult with your Chugh, LLP tax professional today to maximize your pass-through deduction.
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