Sec. 199A Qualified Business Income Deduction (”QBID”) Optimization

Tax Strategy
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Deduction
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Updated
2/18/2023

How It Works

Individual taxpayers with business income from a sole proprietorship (oncuding freelancers and independent contractors), S corporation, or partnership can take the Qualified Business Income Deduction (”QBID”). The QBID is equal to 20% of business income, subject to income limitations.

Individuals can optimize their QBID by adjusting the wages paid by their business and/or purchasing assets when limitations apply. The increase to the QBI Deduction is less than the incremental employment taxes caused by the salary increase.

Eligibility

Taxpayers with sole proprietorships, partnerships, S corporations, and some trusts and estates may be eligible for the qualified business income (QBI) deduction. Rental activities are eligible in some instances.

Action Items

To use this strategy:

  • Confirm that the QBI deduction is subject to limitations.
  • Consider the advantages of investing in depreciable assets or converting contract labor to W-2 employees.

Limits (2023)

For all taxpayers, the QBI Deduction is limited to the lesser of:

  • 20% of Qualified Business Income
  • 20% of taxable income minus net capital gains

There are three income brackets that might limit a taxpayer’s QBI Deduction:

  • Lower Bracket
  • Single:
  • Married Filing Jointly
  • Higher Bracket
  • Single
  • Married Filing Jointly

If your taxable income is within the lower bracket, your QBI Deduction isn’t subject to any limitations.

If your taxable income is in the higher bracket, your QBI Deduction is subject to these limitations:

  • Completely phased out of the associated business is a Specified Service Trade or Business (”SSTB”); and
  • Limited to the lesser of:
  • 20% of QBI or
  • The greater of:
  • 50% of W-2 wages paid by the business; or
  • 25% of W-2 wages plus 2.5% of the businesses assets.

Thus, by increasing salaries paid by their business, taxpayers whose taxable income is within the higher bracket, and whose businesses aren’t SSTBs, can increase their QBI Deduction by avoiding the limitation.

IRC References

I.R.C § 199A Qualified business income-

"In the case of a taxpayer other than a corporation, there shall be allowed as a deduction for qualified business income. The deduction is 20% of qualified business income if taxable income is below certain taxable income limitations, limited if above the thresholds."

This content is for informational purposes only and does not constitute legal, business, or tax advice. You should consult your own attorney, business advisor, or tax advisor regarding matters mentioned in this post. We take no responsibility for actions taken based on the information provided.

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