The Qualified Business Income (QBI) deduction, introduced by the Tax Cuts and Jobs Act of 2017, allows eligible businesses to deduct up to 20% of their qualified business income. This deduction is available to certain pass-through entities such as S corporations, partnerships, and sole proprietorships. However, not all businesses qualify for this deduction. Understanding which businesses are ineligible is crucial for accurate tax planning and compliance.
What businesses are not eligible for QBI deduction? Businesses that fall under the category of a specified service trade or business (SSTB) are not eligible for the QBI deduction if their taxable income exceeds certain thresholds. SSTBs include fields such as health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, and any trade or business where the principal asset is the reputation or skill of one or more of its employees or owners.
Additionally, businesses that generate income through investment management, trading, or dealing in securities, partnership interests, or commodities are also excluded from claiming the QBI deduction. The rationale behind this exclusion is to prevent high-income professionals and businesses from taking advantage of the deduction, which is primarily aimed at supporting small and medium-sized businesses.
Income Thresholds and Phase-Outs
For SSTBs, the eligibility for the QBI deduction begins to phase out once taxable income exceeds $164,900 for single filers and $329,800 for married couples filing jointly (as of the 2021 tax year). The deduction is completely phased out at $214,900 for single filers and $429,800 for married couples filing jointly. This means that high-income earners in specified service trades or businesses will not benefit from the QBI deduction.
It’s important to note that these thresholds are subject to annual adjustments for inflation. Therefore, business owners should stay updated on the current thresholds to determine their eligibility accurately. For non-SSTB businesses, the QBI deduction may still be limited if their taxable income exceeds these thresholds, but they are not entirely disqualified.
Other Ineligible Businesses
In addition to SSTBs, certain other types of businesses are also ineligible for the QBI deduction. For example, C corporations do not qualify because they are not pass-through entities. The QBI deduction is specifically designed for pass-through entities, which means the income “passes through” to the individual owners and is taxed at their individual tax rates.
Furthermore, businesses that do not have any qualified business income are naturally ineligible for the QBI deduction. Qualified business income generally includes the net amount of qualified items of income, gain, deduction, and loss from any qualified trade or business. If a business does not generate this type of income, it cannot claim the deduction.
Understanding the nuances of the QBI deduction is essential for business owners to maximize their tax benefits legally. Consulting with a tax professional can provide personalized advice and ensure compliance with the latest tax laws and regulations.