- Hi everyone.
I'm attorney Aiden Durham, with 180 Law Co
in Denver, Colorado.
And welcome back, to All Up In Yo' Business.
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In this episode of All Up In Yo' Business,
we're gonna talk a little bit
about the qualified business income tax deduction.
Since we're coming up into tax time pretty soon,
this is a topic that's been on a lot of people's minds
and a lot of conversations
as we're preparing to file our taxes.
So, I'm gonna give a little overview of the QBI deduction
and how it might work in your business.
But before we get into it,
please be sure to like, subscribe and share.
Also be sure to check the description,
I've got some freebie downloadable guides
and check sheets and stuff there.
So, the qualified business income deduction
or the QBI deduction,
it allows non corporate tax rate payers,
to deduct up to 20% of their qualified business income.
Now, when I say non corporate tax rate payers,
that essentially means just any business that isn't,
taxed as a C corporation.
So this will apply most commonly to sole proprietorships,
general partnerships, LLCs,
and then entities that are taxed as an S corporation.
So if you're in one of those situations,
with the QBI deduction,
you can potentially take up to 20% of your QBI,
your qualified business income as a deduction.
The term qualified business income,
that has a special meaning to the IRS.
The IRS,
says that the QBI is,
the net amount of qualified items of income,
gain, deduction and loss,
from any qualified trade or business.
It only includes,
things that are qualified as taxable income,
and doesn't typically apply to,
passive sources of income,
such as, interest or dividends or capital gains.
Those usually aren't,
considered in the qualified business income.
Essentially you have to be engaged in the business
or the trade on a regular and continuous basis,
in order for it to be counted as qualified business income.
And then the qualified business income is basically,
like the business's net profits,
the income minus the expenses.
So if you have qualified business income,
and you fall under,
one of these pass through entities
like a sole proprietorship, LLC, S corporation,
then you're eligible to take
the qualified business income tax deduction.
So exactly how it's going to apply and be calculated,
is gonna depend on your income level.
And I'm talking about your total taxable income,
not just your qualified business income.
So if we're looking at this on our actual tax returns,
we would usually list the qualified business income,
that would be on schedule C.
That's where we list out,
the income and losses and other deductions,
for the business itself.
And then that number,
is transferred onto the form 1040,
which is where we calculate our adjusted gross income.
So it's that total taxable income,
and not just the qualified business income
that's going to be subject to the IRS's limits.
For the year 2019,
so for reporting your taxes for 2019,
those income limits for a single person,
$160,700
or $321,400
for married people filing jointly.
And now those thresholds,
that income threshold,
that is before taking into account
the qualified business income tax deduction.
So, that number of that limit is based off of
before you've factored in, the QBI deduction.
For 2020, so next year
when we're reporting our taxes for 2020,
those limits are gonna be a little bit higher.
It's gonna be $163,300
for single people
and $326,600
for married.
Now, if you operate multiple businesses,
you may be able to,
or in some instances you might actually be required,
to aggregate those businesses for the QBI.
In other words,
combining the activities of all of the businesses
to take advantage of the QBI deduction.
So if you have three different businesses
that you're running,
you basically can total up,
their qualified business income,
and then take that 20% deduction,
on the aggregate or total amount.
Now, this is typically only an option,
if the,
person or same persons
owned more than 50% of the business
for a majority of the tax year,
and along with that,
one or both of these other factors need to be met.
Either the business provides,
products or services that are typically offered together,
they share centralized business elements or facilities,
and or they're operated in coordination
with one or more of the other businesses.
So, that's often going to apply for us solo business owners
who may have multiple operations going.
It gets a little bit more complicated
once you go over those income thresholds.
Particularly if you're in a,
specified service trade or business,
which is pretty much like lawyers, accountants,
doctors, health professionals, dentists,
financial advisors, consultants,
those types of professional services or trades,
are excluded from the QBI deduction,
once you've reached the upper limit of the income threshold.
So if you're above that threshold of $160,000,
but you're below the upper threshold,
which is about $210,000,
then your deduction,
what you can take as the QBI deduction,
starts to get reduced.
And the way it gets reduced,
and the calculations for that are,
beyond the scope of this video
and if you're in that situation,
you should be working with an accountant
or a tax professional anyway,
so ask them how to do it.
And then if you're over that upper threshold,
that $210,000 threshold,
and you're in one of these
specified service trades or businesses,
you're in one of these professional categories,
then, you lose the opportunity to take the QBI altogether.
So a few, key takeaways about
the qualified business income tax deduction
or the QBI deduction.
Number one, you have to be a pass through entity.
You can't be a C corporation,
you've gotta be either a sole proprietorship, partnership,
LLC, or taxed as an S Corp.
There are other types of things like trusts
and other vehicles that qualify for the QBI,
but, for the purposes of this video,
I'm not referencing any of those.
You can still take,
any other allowable business deductions
on your schedule C,
in addition to this qualified business income tax deduction,
if your business doesn't have an income,
if your qualified business income is actually a negative,
you can carry over that loss, to the next year.
So, even if you can't take advantage of that QBI deduction
because there's no income,
you can still move it forward to next year
and potentially use that loss to your advantage
for next year's taxes.
The QBI deduction allows you to take,
a below the line deduction of up to 20%
of your qualified business income.
And then finally the deduction
and how it would be calculated and applied,
is subject to these income threshold limits,
and, you know, may be adjusted according to all of that.
And so, if you are trying to take advantage of
the QBI deduction,
there are other things that you might be able to do,
to lower your total taxable income.
And I'm gonna talk about what those things are
in the next video,
so make sure you watch that
and make sure you subscribe
so you don't miss it when I put it out.
That's all for this episode.
Please drop a comment below and let me know what you think.
Keep in mind, I'm not a CPA and I'm hardly a tax expert,
I know just about the basics of taxes
when it comes to business and all that
but I'm no tax expert.
So don't ask me your complicated tax questions,
or anything like that 'cause I don't know.
Also, be sure to check out my blog
for additional information on running your business
and all of that.
Thank you all so much for watching.
I'm Aiden Durham, and I'll see you next time.
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