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Section 199A of the Internal Revenue Code allows certain business owners, including those with sole proprietorships, partnerships, S corporations, LLCs, and some trusts and estates, to claim a deduction of up to 20% on income from a qualified trade or business, qualified real estate investment trusts (REITs), and qualified publicly traded partnerships.
The business must be U.S.-based and subject to U.S. taxation to be eligible. This deduction is available until 2025, though many small business groups are pushing for Congress to extend it permanently.
Deduction Eligibility
The deduction applies if you have pass-through income from a U.S. trade or business, meaning the income is reported on your personal tax return instead of the business tax return. The deduction only applies to qualified business income (QBI), which includes net profit from a qualified domestic trade or business. However, income like wages, investment income, and guaranteed payments to partners are excluded from QBI.
The amount you can deduct depends on your income level. If your business is considered a specified service trade or business (SSTB)—such as those in fields like healthcare, law, accounting, consulting, performing arts, or athletics—your income may be too high to benefit from this tax break.
Calculating the Deduction
For 2024, the full 20% deduction is available if:
- You are single with taxable income under $191,950.
- You are married filing jointly with taxable income under $383,900.
If your income exceeds these limits, the deduction starts to phase out.
For non-SSTB businesses, the deduction is the lesser of:
- 20% of QBI, or
- The greater of:
- 50% of W-2 wages paid by the business, or
- 25% of W-2 wages plus 2.5% of the unadjusted basis of qualified property after acquisition.
For SSTBs, the deduction begins to phase out when taxable income exceeds $191,950 for single filers and $383,900 for married filers. The deduction fully phases out at $241,950 and $483,900, respectively. However, the specific nature of your business may impact the amount you can deduct.
Other Important Considerations
Qualified business income generally includes necessary business expenses like rent, supplies, insurance, employee wages, benefits, and self-employment costs (such as health insurance and retirement plan contributions). It also includes depreciation of qualified property, as well as other business deductions like professional fees and marketing expenses. However, capital gains, dividends, interest income, and foreign income are excluded, as are certain wages and guaranteed payments to partners and shareholders.
When filing taxes, note:
- The deduction can be up to 20% of your taxable business income but cannot exceed 20% of your total taxable income.
- You can claim the QBI deduction even if you use the standard deduction.
This deduction is a valuable tax benefit for small business owners, such as sole proprietors filing Schedule C, real estate investors filing Schedule E, and individuals with business income reported on a Schedule K-1 from a partnership, S corporation, trust, or estate.
Claim the Deduction Correctly
To ensure you claim the deduction correctly and maximize your tax savings, it’s wise to consult with us.