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The 20% Qualified Business Income Deduction – Congress Denies the Deduction to Certain Successful Business Owners

In Part 1 of this 4-part series, we introduced the extraordinary power of the Qualified Business Income (QBI) deduction to slash your business owner client’s taxes by as much as 20%. We ended Part 1 with a heads-up that restrictions apply. We’ll take a close look at a key restriction in this article – Part 2 of our series.

But first, two quick reminders: 1) only “pass-through” businesses qualify (think Sole Proprietorship, Partnership, LLC (potentially), or S Corporation), and 2) the 20% QBI deduction is free; it requires no expense to support the deduction.

If a free 20% tax cut sounds too good to be true, you may be on to something. As a matter of fact, Congress denied the 20% QBI deduction to owners of Specified Trades or Businesses (SSTBs) if they are “too successful.” The deduction phases out at higher taxable incomes. By the way, what’s an SSTB? Think of an SSTB as one in which personal services are the primary driver of revenue. Examples include brokerage, investment, accounting, financial service, health services, and consulting businesses. However, see the caveat at the end of this article.

We’ll begin with the 10,000-foot view and then get more granular until we reach the ground.

  • General Rule – “Pass-through” businesses are generally considered Qualified Businesses.
  • Exception – “Specified Service Trades or Businesses” (SSTBs) are NOT considered qualified businesses.
  • Exception to the Exception – Even SSTB business owners can claim the 20% QBI deduction if they are not “too” successful.

For example, an SSTB business owner filing federal income taxes as married filing jointly can potentially take the full 20% QBI deduction if taxable income is $321,400 or less in 2019. If taxable income is greater than $321,400 but below $421,400, a partial deduction may be available.

As a final note – the QBI deduction is calculated based upon the lower of adjusted profit from the business or the owner’s taxable income with adjustments. Stay tuned for our next article in this 4-part series as we reveal exactly what adjustments are required to profit and taxable income so that we can illustrate specific tax savings opportunities.

Caveat – not all service businesses are SSTBs! Engineering, contracting, architecture, restaurants and a number of other businesses are not generally considered SSTBs.