One of the most beneficial provisions of the Tax Cuts and Jobs Act of 2017 was the introduction of the Qualified Business Income Deduction, commonly referred to as QBID. It became effective January 1, 2018 and is set to expire on December 31, 2025. QBID is a 20% deduction of qualified business income that reduces taxable income on your personal return.

Qualified business income includes income from s-corporations, partnerships, sole proprietorships, rentals, and some trusts and estates. C-corporation income and income you receive as an employee does not qualify for QBID. Income from publicly traded partnerships and real estate investment trusts also qualifies. If you receive a 1099 for dividend income from your broker, you might see “199A Dividends” listed with an amount. This indicates that you can take a deduction of 20% of that 199A dividend amount, so don’t miss those tax savings!

Like most tax deductions, there are income limitations. For 2024, the deduction may be limited once taxable income exceeds $191,950 for single filers and $383,900 for married filing joint filers. Once you are above these amounts, QBID is limited to 50% of W-2 wages paid by the business or the sum of 25% of the wages PLUS 2.5% of the unadjusted basis of certain fixed assets in the business. Net capital gains also impact the calculation. QBID will be the lesser of 1) 20% of the qualified business income or 2) total taxable income after subtracting net capital gains.

The deduction is limited further for businesses identified by the IRS as specified service trades or businesses (SSTB). For SSTBs, the deduction begins to phase out once taxable income exceeds $191,950 for singles and $383,900 for joint filers and is fully phased when taxable income exceeds $241,950 for singles and $483,900 for joint filers. Once taxable income is above these thresholds, an SSTB no longer qualifies for QBID regardless of wages or unadjusted basis of fixed assets. The IRS classifies the following professions as SSTBS: health, law, accounting, actuarial science, performing arts, consulting, athletics, health, financials services, and investment management. Additionally, the IRS states that an SSTB is “any trade or business where the principal asset is the reputation or skill of one or more of its employees or owners.”

As you can see, there are quite a few nuances with QBID so please reach out to your Ketel Thorstenson, LLP advisor with any questions!