The recent tax reform law passed by Congress has brought a ton of new changes – and new opportunities – for businesses looking for tax deductions this year. Read our recent updates on changes to the international income tax deduction and the corporate dividends received deduction. This week, we’re covering the Qualified Business Income (QBI) Deduction.
What is the QBI?
Under the new tax law passed by Congress in January, 2018, certain types of business entities are entitled to take a 20% deduction on “qualified business income” earned. These entities include:
What is qualified business income? Basically, it’s the ordinary, non-investment income your business generates. Think of it as your revenue from sales, without things like interest or dividend income or any other gains from sale of property. It also excluded earned income like salaries and guaranteed payment. Before you start celebrating what looks like a lot of free money, note that the deduction is limited to the lesser of EITHER 20% of qualified business income, or 50% of the total W-2 wages paid by the business.
Here’s an example of the MAJOR impact the QBI can have on your tax return (its an over simplified version for ease of explanation):
The fine print: this limitation does not apply for taxpayers below the following threshold amounts. Likewise, this table is a bit of an oversimplification of a complicated deduction. To fully understand if your business can claim QBI, contact one of our experts.
These amounts are indexed for cost-of-living adjustments in $50 increments.
How to take advantage of the QBI Deduction
As previously noted, the QBI can only be claimed by certain business entities. Cannabis companies that have registered as partnerships, S corporations, or sole proprietorships may be able to take advantage of the QBI. Registering your business as one of these entities gives you a competitive tax advantage over C corporations, as well as a competitive advantage over employees. Its important to structure your business in a way that can allow maximum deductions.
The QBI deduction can get complicated pretty quickly, so if you want to take advantage of this deduction on your taxes this year, get in touch with the experts at California Cannabis CPAs.
Lastly, please note that the QBI deduction will not apply after 2025. Therefore, if you’re interested in taking advantage of this deduction, now is the time! It also means that you shouldn’t structure your entire business around this one deduction: if none of these business entities feel right for your particular needs, it’s not worth changing your entire business model to suit a deduction that expires in 2026. If you do decide an S Corp, sole proprietorship, or partnership is right for you, consult with our experts to make sure your company is structured appropriately to take advantage of the QBI.