If you own a business, the QBI deduction is one line on your tax return you should know by name. It's called the qualified business income deduction. Section 199A is the technical name. Your CPA might just call it "QBI."
What it does is simple. You take 20 percent of what your business earned and subtract it from your income before the tax gets figured. If your business cleared $200,000, that's $40,000 you don't get taxed on. Depending on your bracket, that's somewhere around $9,000 or $10,000 you don't hand over. It's one of the better breaks in the tax law for people who own a business instead of working at somebody else's.
Most owners assume it works the same way for everyone. It does not.
There are two clients who came to me this year I'll cite as general examples. I'll change the names.
Marisol has a landscape design company. Twenty-some years in, she has good margins. She's worked hard and the business is profitable. Every year that 20% deduction shows up on her return and she gets all of it.
Dev sells products online. He has a bigger company than Marisol's, and he had a better year with more profit. He lost most of his deduction.
Why? He didn't do anything wrong. But he crossed a line nobody warned him about.
If your income is under a certain amount set by the government, you get your 20 percent deduction. Once your income goes over that amount, the rules change. Now it depends on how much your business pays out in paychecks. It depends on what kind of business you're in. It depends on what you own.
Land on the wrong side of any of those and the QBI deduction shrinks. And sometimes, it disappears.
Marisol is under the line, so there's nothing for her to fix. Dev is over it, and nobody told him the rules were different for him now.
Nothing warns you when you cross that line, and that's the part that bothers me. Your return still gets filed. The deduction still shows up on it. It's just smaller than it should have been, and nothing on the page tells you why.
Over the next few weeks I'll walk you through what happens on the other side of that line. Dev's story first, then a couple of others. I'm not trying to teach you to do your own math. I want you to know what to ask your CPA or tax strategist about, and when.
I strongly suggest you pull up last year's return and look for the qualified business income deduction. It's a single line. If it's a lot smaller than 20 percent of what your business made, there's a reason. It's important that you find out what it was.
Next week: how a company that made $600,000 ended up with a deduction its owner didn't recognize.
The qualified business income (QBI) deduction, also called the Section 199A deduction, lets eligible owners of pass-through businesses — sole proprietorships, partnerships, S corporations, and some trusts and estates — deduct up to 20 percent of their qualified business income before tax is calculated.
Up to 20 percent of your qualified business income. If your business earned $200,000, the deduction could remove up to $40,000 from your taxable income — roughly $9,000 to $10,000 in tax savings depending on your bracket.
Once your taxable income rises above the annual threshold set by the IRS, the full 20 percent is no longer automatic. The deduction becomes limited by how much your business pays in W-2 wages, the type of business you operate, and the property it owns — so it can shrink or disappear even though nothing on the return flags why.
The IRS sets an annual taxable-income threshold that is adjusted each year. Below it, you generally get the full 20 percent. Above it, the wage-and-property limits and the type-of-business rules kick in, which can reduce the deduction. Because the number changes yearly, confirm the current threshold with your tax advisor.
An SSTB is a business where the principal asset is the reputation or skill of its owners or employees — fields like health, law, accounting, consulting, and financial services. Above the income threshold, SSTB owners face additional limits and can lose the QBI deduction entirely.
Pull last year's return and find the qualified business income deduction line. Compare it to 20 percent of your business's income. If it's noticeably smaller, an income threshold or one of the related limits likely reduced it — and it's worth asking your CPA exactly which one.
Once you know where you stand, these guides cover what to do about it:
P.S. These are composites and I've rounded the numbers to keep them readable. Your situation depends on things I can't see from here, so take this as a reason to ask a question — not as advice about your return.
Disclaimer: This article is for general educational purposes only and does not constitute tax, legal, or accounting advice. The QBI deduction and its income thresholds depend on your specific facts and circumstances. Please consult a qualified tax professional before relying on anything discussed here.