The New Business Deduction ( Stop worrying and start preparing )
A new deduction is
available to businesses with qualified business income (QBI). While that's
great news, new deductions (especially ones with lots of rules) can bring
anxiety and confusion. Never fear! Ensuring you receive a maximum deduction
will come down to providing the proper information. Here is some knowledge to
help you cut through the confusion:
What
is the QBI deduction?
In short, it's a 20
percent deduction against ordinary income, taken on your personal tax return, that reduces qualified business income earned
for most pass-through businesses (sole proprietorships, partnerships and
S-corporations). It's not an itemized deduction, so you can take it in addition
to the standard deduction. To qualify without limitations, your total taxable
income needs to be below $157,500 ($315,000 for married couples) for 2021. If
your income exceeds the threshold, it gets complicated.
What
you need to know:
·
If
your total taxable income is above the income threshold, your deduction may be
limited or nullified. If your income is
below the threshold, the calculation is pretty straightforward. If not,
additional phase outs, limitations and calculations come into play. The first
limitation to consider is whether or not your business is qualified. Certain
specified service trades or businesses (SSTBs) are excluded from the deduction
altogether if taxable income is over the threshold. If your business is not an
SSTB, other calculations related to W-2 wages and basis in qualified business
property may be required.
·
Schedule
K-1s for S-corporations and partnerships have new codes. Businesses with partners and shareholders are
now required to report information related to the QBI deduction on each
Schedule K-1 they issue. Based on the draft versions of the forms, the new
codes will be in Box 17 for S-corporations (V through Z) and Box 20 for
partnerships (Z through AD). If you receive a Schedule K-1, check to see if the
new codes have values associated with them. If not, contact the issuing
business to correct the mistake. Schedule K-1s without the required data will
delay your tax-return filing.
·
Certain
data needs to be collected. For the most part, the data required to calculate your
deduction will be included on the normal forms needed to file your taxes. Here
is list of common documentation to watch for that may be required to calculate
your QBI deduction:
·
Business financial
statements.
·
Forms W-2 and W-3
issued by your business
·
Purchase information
related to business assets
·
Schedule K-1s
·
Forms 1099-B with
cost/basis information
·
The
sooner you close your books, the better. The new deduction means more work. Knowing
your final business net income as soon as possible gives you extra time to work
through the additional necessary calculations. If your business is required to
issue Schedule K-1s, even more time may be required.
·
More
guidance is expected from the IRS. In August, the IRS published guidance to
clear up some of the confusion regarding the deduction, but it didn't cover
everything. The American Institute of CPAs (AICPA) responded with 11 specific
items that still need to be addressed.
With proper planning
and preparation, you can rest easy knowing that obtaining your shiny, new QBI
deduction is in good hands.
As always, should you have any questions or
concerns regarding your tax situation please feel free to call.
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