Lowdown On Qualified Business Income Deduction (QBID)
Breif Summary of Qualified Business Income Deduction (QBID)
Section 199A deduction (aka Qualified Business Income Deduction -or- QBID for short) is a significant tax break for small business owners that was enacted in 2017. QBID is basically a 20% deduction of net qualified business income.
Here is an example of how QBID is calculated
FOR EXAMPLE: if you make $100,000 GROSS, the deduction is $20,000, which is then multiplied by your marginal tax rate of 24% which equals $4,800 back in your pocket. (Straightforward?! Well there is more to it than that…)
If your taxable income is less than $157,500 (as a single filer) or $315,000 (as a married filing jointly filer) then the 20% deduction is fully available. However, if your taxable income exceeds $157,500 (as a single filer) or $315,000 (as a married filing jointly filer) you will receive the lessor of 50% of W2 wages or 20% of taxable income. (THIS IS WHERE HAVING PAYROLL REALLY COMES INTO PLAY)
If Person A is a sole proprietor and has $500,000 in taxable income but did not pay any W2 wages, their deduction would be the lessor of 50% of W2 wages ($0 in this example) or 20% of the $500,000. However, if Person A paid out $200,000 in wages and has $300,000 in taxable income their Section 199A would be the lessor of 50% of $200,000 or 20% of $300,000. Simply put, Person A would deduct $60,000 ($60,000 is less than $100,000).
The example demonstrates the need for certain companies to try and maximize their amount of W2 wages by putting people and themselves on payroll in order to maximize their possible deductions.
Please note that this is a brief overview and we here at Logistis are willing to discuss the particulars further.