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What to Know About the Qualified Business Income Deduction

If you’re an entrepreneur and you’ve heard other business owners talking about the qualified business income deduction (also called Section 199A), you’re probably asking yourself, “Should I incorporate to help save on taxes?” and “What entity should I select?”

Lots of business folks want to form an LLC because it can save you money on taxes, but there’s a caveat. The new tax law’s 20% deduction on qualified business income is subject to limitations that keep it from being just a giveaway for anyone who runs a business.

To qualify for the full deduction, your taxable income must be below $157,500, or $315,000 if you’re married and you and your spouse file jointly. If your income is below the threshold, you may take the deduction no matter what business you’re in. But if your income is higher, there are limits on who can take the break.

Some fine print:

How can you optimize the deduction? Here are a few ways:

This is just an introduction to a complex topic. Also, new guidance from the IRS may change some of the details, which means many provisions are not etched in stone. For example, the IRS issued in late September Revenue Procedure 2019-38, which offers a safe harbor allowing certain interests in rental real estate, including interests in mixed-use property, to be treated as a trade or business for purposes of the QBI deduction, under Section 199A.

Bottom line? Be sure to get professional advice to make sure you’re making the right decisions about your pass-through entity.

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