Qualified Business Income Deduction

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The Tax Cuts and Jobs Act (TCJA) introduced one of the most impactful tax benefits for pass-through entities: the 20% Qualified Business Income (QBI) Deduction under Section 199A. This deduction allows eligible taxpayers, including owners of S Corporations, Partnerships, and Sole Proprietorships, to deduct 20% of their QBI on their personal tax returns. However, the rules surrounding this deduction are complex, particularly for Specified Service Trades or Businesses (SSTBs). This deduction is not available to C Corporations.

What is the Qualified Business Income Deduction?
Section 199A allows taxpayers to deduct 20% of qualified business income earned through a qualified trade or business. However, the deduction is limited to the greater of:

50% of W-2 wages with respect to the trade or business, or
The sum of 25% of W-2 wages plus 2.5% of the unadjusted basis immediately after acquisition of all qualified property (typically tangible property subject to depreciation).

Additionally, the deduction is capped at taxable income for the year minus net capital gain and aggregate qualified cooperative dividends.

Which Businesses Qualify for the QBI Deduction?
Generally, all trades and businesses qualify, except for Specified Service Trades or Businesses (SSTBs), including businesses where the principal asset is the reputation or skill of one or more employees or owners. Under Section 199A, SSTBs include businesses involved in:

Health (e.g., doctors, nurses, physical therapists)
Law (e.g., lawyers, paralegals, legal arbitrators)
Accounting (e.g., CPAs, auditors, tax preparers)
Actuarial Science
Performing Arts (e.g., actors, musicians, directors)
Consulting (unless connected to the sale of goods or services)
Athletics (e.g., coaches, team managers)
Financial Services (e.g., financial advisors, investment bankers)
Brokerage Services (e.g., stockbrokers)
Investing and Investment Management
Trading or Dealing in Securities, Commodities, or Partnership Interests

However, Engineering and Architecture are notably excluded from SSTBs, allowing them to fully qualify for the QBI deduction. A real estate agent is not considered an SSTB, therefore fully eligible for the QBI deduction.

For SSTBs, the QBI deduction begins to phase out at:

$383,900 for taxpayers filing jointly, and
$191,950 for all other taxpayers.

To maximize the QBI deduction, consider increasing W-2 Wages or Acquiring Qualified Property to meet the W-2 wage or qualified property requirements to maximize the deduction for higher-income taxpayers. If you own a business in Florida, reach out to Sheppard Morris CPAs today. Our team is here to help you stay compliant with the latest tax regulations.

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