Maximize Your QBI Deduction Before It’s Gone: Act Now!
Introduced by the Tax Cuts and Jobs Act (TCJA), the Qualified Business Income (QBI) Deduction has become a cornerstone tax break for business owners. However, this valuable deduction is scheduled to sunset after 2025, making it critical for eligible taxpayers to maximize your QBI deduction and take full advantage of its benefits while it’s still available.
At Molen & Associates, we specialize in helping businesses and self-employed individuals optimize their tax strategies. This guide explains the QBI deduction, its limitations, and strategies to maximize its value before it potentially disappears.
What Is the QBI Deduction?
The QBI deduction allows eligible taxpayers to deduct up to 20% of their qualified business income (QBI) from certain pass-through businesses. It applies to:
- Income from sole proprietorships and single-member LLCs treated as sole proprietorships for tax purposes.
- Income from partnerships, multi-member LLCs, and S corporations.
- Up to 20% of qualified dividends from real estate investment trusts (REITs) and publicly traded partnerships (PTPs).
Important Notes:
- The QBI deduction does not reduce your adjusted gross income (AGI).
- It does not reduce your self-employment tax or net investment income tax liabilities.
What Counts as QBI?
QBI includes:
- Income or gains from a qualified business, reduced by related expenses, losses, and deductions such as:
- Allocable retirement plan contributions.
- 50% of self-employment taxes.
- Self-employed health insurance premiums.
QBI excludes:
- Income earned as an employee.
- Wages or salaries paid to S corporation shareholder-employees or C corporation employees.
- Guaranteed payments to partners or LLC members for services rendered.
QBI Deduction Limitations
While many taxpayers can claim the full deduction, limitations come into play for higher-income earners.
2023 Income Thresholds
- Deduction phases out for taxable income exceeding $182,100 (single) or $364,200 (married filing jointly).
- Fully phases out at $232,100 (single) or $464,200 (married filing jointly).
2024 Income Thresholds
- Deduction phases out for taxable income exceeding $191,950 (single) or $383,900 (married filing jointly).
- Fully phases out at $241,950 (single) or $483,900 (married filing jointly).
For those above these thresholds, limitations are based on:
- W-2 Wages Paid by the Business:
- Deduction is limited to 50% of wages paid.
- Wages + Property-Based Limit:
- Deduction is limited to 25% of wages plus 2.5% of the unadjusted basis immediately after acquisition (UBIA) of qualified property used by the business.
Note for SSTBs:
Specified service trades or businesses (SSTBs) face stricter limits. If taxable income exceeds the phaseout threshold, no QBI deduction is allowed for SSTB income.
What Is an SSTB?
An SSTB includes professions where the primary asset is the reputation or skill of the owner or employees. Fields include:
- Health, law, accounting, actuarial science, consulting, athletics, and performing arts.
- Financial and brokerage services, investing, and trading.
- Businesses based on endorsements or licensing income.
Exception: Architecture and engineering firms are not considered SSTBs.
Strategies to Maximize Your QBI Deduction
With the QBI deduction set to expire after 2025, it’s essential to make the most of this opportunity. Consider these strategies:
1. Aggregate Businesses
If you own multiple businesses, you may benefit from aggregating them to maximize the deduction. This strategy works if:
- One business has significant W-2 wages but low QBI.
- Another business has high QBI but minimal wages.
By aggregating, you combine income and expenses, potentially increasing your QBI deduction.
Key Point: You cannot aggregate an SSTB with other businesses.
2. Manage Depreciation Deductions
Generous first-year depreciation deductions can reduce taxable income, but they also reduce QBI. To balance your deduction strategy:
- Consider forgoing large first-year deductions under Section 179 or bonus depreciation.
- Depreciate assets over several years using the regular Modified Accelerated Cost Recovery System (MACRS).
This approach preserves QBI, which is a “use-it-or-lose-it” benefit, while future depreciation deductions may become more valuable if tax rates increase.
3. Reassess Retirement Contributions
Contributions to retirement plans reduce taxable income but also reduce QBI. To optimize your deduction:
- Weigh the benefits of reducing current taxable income against preserving QBI.
- Focus on tax-advantaged plans that do not reduce QBI, such as traditional or Roth IRAs.
4. Evaluate Filing Status
For married couples, filing separately may help maximize the QBI deduction by lowering each spouse’s taxable income.
Example:
A business owner filing jointly may lose their QBI deduction due to combined income exceeding the phaseout threshold. Filing separately might preserve the deduction, but this strategy requires careful analysis of the overall tax impact.
2023 and 2024 Planning Opportunities
If you have not yet filed your 2023 tax return, review the strategies above to maximize your QBI deduction. For 2024 and 2025, start planning now to align your income and expenses with the rules.
Takeaways
- The QBI deduction allows pass-through business owners to deduct up to 20% of their qualified business income.
- It does not reduce AGI or self-employment tax liabilities.
- High-income earners and SSTBs face limitations, but strategic planning can maximize the benefit.
- The deduction is scheduled to sunset after 2025, making proactive tax planning essential.
How Molen & Associates Can Help
At Molen & Associates, we specialize in tax planning for small businesses, self-employed professionals, and high-income earners. Our experienced team can help you:
- Analyze Eligibility: Determine how the QBI deduction applies to your business.
- Optimize Income and Deductions: Use strategies like aggregation, depreciation management, and retirement planning to maximize benefits.
- Plan for the Sunset: Develop a long-term tax strategy to prepare for the deduction’s expiration in 2025.
Why Choose Molen & Associates?
- 40+ Years of Experience: Trusted by businesses and professionals since 1980.
- Personalized Support: Tailored strategies to fit your unique financial situation.
- Year-Round Guidance: Ongoing advice to adapt to tax law changes and deadlines.
Don’t Miss Out on This Valuable Tax Break
The QBI deduction represents a significant opportunity for business owners, but it’s set to expire after 2025. Take action now to maximize your benefits before it’s gone.
Call Molen & Associates today at 281-440-6279 to schedule a consultation, or visit our website to learn more about our tax planning services. Let us help you make the most of this tax-saving opportunity.
