With Section 199A of the Trump tax reform (the Tax Cuts and Jobs Act of 2017) small business owners may be eligible to take a 20% tax deduction off their profit – it’s called the qualified business income deduction, or QBI deduction.
In this video, Pure Financial Advisors’ Alan Clopine, CPA gives a brief overview of this new tax deduction.
The Tax Cuts and Jobs Act of 2017. We got a new deduction for business owners, and it can save you a lot of taxes, but you need to understand how it works. It’s called QBI, qualified business income. It allows you to take a deduction of up to 20% of your profit. So let me give you an example.
So if you have $150,000 of gross income – that’s what you bill your clients. And then you have $50,000 of expenses. So your net is $100,000. Gross 150, expenses 50, you net $100,000, that’s your net income. You take 20% of that net income, that would be $20,000 is a tax deduction if you’re in the 22% tax bracket you would save $4,400 tax because of this new deduction. Its brand new, it’s to help small businesses. It’s partly because larger corporations got a lower tax rate and smaller businesses; it was felt that they should get some break as well. There’s a few limitations you need to understand.
One is your taxable income needs to be equal to or greater than your net income. So in my example of $100,000 business profit, if your taxable income is less than that, let’s say it’s $80,000, then the deduction is 20% of $80,000, not $100,000. So that’s one thing you need to be aware of.
Another thing is if your income – taxable income – is high. And that’s defined as a single person taxable income above $157,500, or married couple, taxable income above $315,000. That is where these deductions can start phasing out. And it depends upon whether you’re a service business or a non-service business when you’re in those higher income levels. There’s a whole lot of confusion on what’s a service business and what is not a service business. So if you are in these higher income levels, get some help on that, because it’s not that simple, and in fact, every time we pass a new tax law it becomes more complicated. This one was no different. But it’s important to know this QBI deduction is going to save you money that allows you to have more net in your pocket, more to spend on your business, more to spend personally, or whatever you would like to use that money for. If you would like more information, go to PureFinancial.com.