This “New Business” deduction is great news, but it comes with a lot of strict rules. To qualify, your business must meet the qualified business income (QBI).
What is a “QBI” deduction? It’s a 20% deduction taken on your personal tax return, against ordinary income. It is to reduce the qualified business income earned for most pass-through businesses such as partnerships, proprietorships, and S-corporations. Since this is not an itemized deduction, you can take this deduction in addition to the standard deduction. To be sure that you receive the maximum deduction, you will need to provide all the proper information necessary.
In order to qualify for this deduction with no limitations, your taxable income must be below $157,500 for singles and $315,000 for married couples. Things can get complicated when your income exceeds the QBI income threshold. Below are things you will need to know when your taxable income is more than the income threshold.
* Your deduction may be limited or invalid. Although calculations may be clear-cut when your income is below the limit, when your income is above the limit you have added calculations, limitations, and phase-outs. The first thing you will need to do is to find out if your business is qualified.
There are certain specific service trades or businesses (SSTB) that will be excluded from this deduction altogether if the income is over the threshold. When a business is not an SSTB there are other calculations related to basis in qualified business property and W-2 wages may be required.
* New Schedule K-1s codes for S-corporations and partnerships. It is now required that a business that has partners and shareholders report information that is related to the QBI deduction on each Schedule K-1 issued. For S-corporation the new codes will be in Box 17 (Z-AD). For partnerships, the new code will be in Box 20 (Z-AD). If you receive a Schedule K-1, be sure to check if the new codes have values with them. If there are no codes you should contact the business that issued the schedule K-1 so they can correct the error because without the required data it will delay your tax return filing.
* Necessary data. The data necessary to calculate your deductions should be included on the normal forms you need to file your tax forms. Below is a list of common documentation that may be required to calculate your QBI deduction:
* Your business financial statements.
* The Forms W-2 and W-3 issued by your business.
* Any purchase information that is related to your business assets.
* Schedule K-1s.
* Forms 1099-B with cost/basis information.
* Close your books as soon as possible. There is extra work with the new deductions. You will have more time to work through the necessary additional calculations if you know your final business net income sooner than later. Even more time may be needed if it’s your business is required to issue Schedule K-1s.
The IRS published guidance regarding this deduction in August 2018, but the article didn’t cover everything. There are still items that need to be addressed by the IRS at this time.
At Summit CPA we offer multiple resources to assist you with all of your tax and financial planning needs. For more information, contact our office at 866-497-9761 to schedule an appointment with our advisors.