Individual taxpayers with business income from a sole proprietorship (oncuding freelancers and independent contractors), S corporation, or partnership can take the Qualified Business Income Deduction (”QBID”). The QBID is equal to 20% of business income, subject to income limitations.
Individuals can optimize their QBID by adjusting the wages paid by their business and/or purchasing assets when limitations apply. The increase to the QBI Deduction is less than the incremental employment taxes caused by the salary increase.
Taxpayers with sole proprietorships, partnerships, S corporations, and some trusts and estates may be eligible for the qualified business income (QBI) deduction. Rental activities are eligible in some instances.
To use this strategy:
For all taxpayers, the QBI Deduction is limited to the lesser of:
There are three income brackets that might limit a taxpayer’s QBI Deduction:
If your taxable income is within the lower bracket, your QBI Deduction isn’t subject to any limitations.
If your taxable income is in the higher bracket, your QBI Deduction is subject to these limitations:
Thus, by increasing salaries paid by their business, taxpayers whose taxable income is within the higher bracket, and whose businesses aren’t SSTBs, can increase their QBI Deduction by avoiding the limitation.
I.R.C § 199A Qualified business income-
"In the case of a taxpayer other than a corporation, there shall be allowed as a deduction for qualified business income. The deduction is 20% of qualified business income if taxable income is below certain taxable income limitations, limited if above the thresholds."
This content is for informational purposes only and does not constitute legal, business, or tax advice. You should consult your own attorney, business advisor, or tax advisor regarding matters mentioned in this post. We take no responsibility for actions taken based on the information provided.
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