So what’s all the hype about this special 20% tax break for small business owners? Well, it can really add up to some big savings!
First, you must have “pass through” income. This means income as a sole proprietor, Limited Liability Company (LLC), partnership or S corporation. Next, you must have Qualified Business Income (QBI) – this just means pass-through income that is NOT interest, dividends, foreign, capital gains/losses, etc. Finally, if your taxable income is over a certain amount, your deduction may be reduced or completely eliminated.
What are the income limits?
For 2019, if you are single and your TOTAL taxable income is less than $160,700 or married with TOTAL taxable income of less than $321,400 – you are golden! If your taxable income is above these limits – don’t fret yet. You may still qualify for at least a portion of the deduction but it depends on the type of business you run.
If your pass through business provides personal services such as medical, accounting, legal, business consulting, etc., the deduction phases out to zero once you exceed taxable income of $210,700 if you are single or $421,400 if you are married.
How is the deduction determined?
If your taxable income is below the income thresholds mentioned above, the deduction is 20% of your taxable business income.
If your taxable income is above the thresholds mentioned above, the amount of the deduction is tied to the amount of wages you paid to employees (if any) and the value of the property that the business owns.
Show me the savings!
Let’s say your net taxable business income is $50,000 and this is reported on a Schedule C of your Form 1040. Also assume that your total taxable income (including any non-business income) is below the limits discussed above. You can take $10,000 right off your adjusted gross income! If you have a effective tax rate of, say, 25% – you may have just saved $2,500 on your taxes. Happy day!
If you have any questions about this deduction, please don’t hesitate to contact Valerie for more information.