Small to mid-size business owners in Georgia and across the country are breathing a sigh of relief as recent proposed changes to tax laws may avoid a key perk for pass-through entity income, at least for now. With the current administration’s 2022 fiscal budget proposal including huge increases in federal spending, many had feared that legislators were eyeing a key provision of the tax law changes of 2017, which creates a reduction in tax liability for many small businesses.
As over 90% of businesses in the United States are entities with pass-through income, the generous Qualified Business Income (QBI) deduction has helped many to stay above water during the economic challenges of the past year-and-a-half. The current administration may be shying away from eliminating the deduction, even if it does also benefit higher income bracket families.
What the QBI deduction is and what it does
As part of the 2017 Tax Cut and Jobs Act, the QBI deduction, also called Section 199A, offers two avenues of tax relief for owners of S corporations, partnerships and sole proprietorships, plus some estates and trusts. The deduction is possible whether the business owner uses Schedule A to itemize deductions or the standard form. Taxpayers may claim two deductions:
- Up to 20% of the QBI deduction on pass-through income, subject to some restrictions depending on the type of W-2 wages the business owner pays or if they are a patron of an agricultural or other cooperative
- Up to 20% of qualified real estate investment trust (REIT) dividends and/or qualified traded partnership (PTP) income, depending on the PTP’s business
The limit of the deductions is the lesser of 20% of taxable income minus net capital gain or the QBI and REIT/PTP combined component. QBI does not include such income as:
- Wage income
- Capital gains or losses
- Income from business transactions outside of the United States
- Annuities receivable from outside the business
- Guaranteed payments from a partnership
Regarding real estate enterprises, Section 199A also provides safe harbor for rental property owners with passthrough entities, as long as they meet specific criteria.
What the future holds
Many had feared that the current administration’s strategy for making wealthy Americans pay their fair share would include eliminating the QBI deduction. After all, experts have predicted that the top 1% of families will receive over 60% of the QBI’s pass-through benefits by 2024. For now, though, the QBI deduction is off the chopping block, as government policy is aimed at helping small businesses and the middle class.
As tax laws keep changing, it is crucial for business owners to stay one step ahead of the game with strategies to minimize tax implications, avoid or reduce tax burdens and eliminate tax compliance issues.