QBI deduction optimization is a great end of year planning technique For high income SMB owners.

When used correctly, optimizing has saved my clients tens and hundreds of thousands of dollars annually.

If you are already on it then good for you.

If not - thread incoming👇🏻

The QBI or Qualified Business Income deduction was a part of the TCJA from 2017.

When congress lowered the corp tax rate to 21% they decided to throw a bone to small businesses by offering a 20% deduction on qualified income.

These include Schedule C and pass through entities.

This allows anyone conducting trade or business out of a pass through entity to take a 20% deduction on their income. Great right?

However there are a few limitations including a phase out for high income earners.

The phase begins at 326k for married and 163k for single/HOH.

If your taxable income is above that threshold you are allowed to deduct the lesser of:

1. 20% of QBI
Or
2a. 1/2 W-2 wages (or)
2b. 1/4 W-2 wages + 2.5% unadjusted property basis (RE pros look here).

This means there is a wage limitation to your QBI deduction.

Simple example. Married S-Corp owner makes 300k after he pays employees - what is his deduction? 60k

Ex2. Married S-Corp owner makes 500k after he pays employees 100k total wages - what is his deduction? 50k.

The owner cannot take the 20%, but is limited to 1/2 of wages paid.