Do you know how much your business can deduct from qualified business income? If you are a business that is located in the United States, you may be able to deduct up to 20 percent of your business income, as well as some dividends. Learn everything you need to know about what is qualified business income and 199A deductions.
The Complete Guide to 199A Deductions for Qualified Business Income
The 2017 Tax Bill set acting-regulations for the qualified business income deduction (QBID) or 20% deduction, as defined by Section 199A of the IRS tax code. Qualified business income is the net amount of income gain, loss, deductions, and other income that comes from business activity. The IRS considers a qualified business entity as any trade or business, business partnership, S corporation, a business trusts, or sole proprietorship.
Only taxable income items are acceptable deductions, under Section 199A. The IRS does not allow you to make a QBID for capital gains or losses, interest income, some dividends, or income from an employee performing a service. And, qualified business income deductions can be itemized, or included in a standard deduction.
There are additional limitations and exceptions to filers with an individual annual income over $163,300, or joint-income over $326,600 for 2020 – but, these figures are adjusted annually. The limitations and exceptions depending on the nature of the taxpayer’s business or trade, as well as W-2 wages. The IRS looks at the amount of wage paid to employees, as represented on your business W-2 filings.
Can I Claim a 199A Deduction on Income from Real Estate Rentals?
If your business earns income through a C corporation, it does not qualify for the qualified business income deduction. A qualified trade or business excludes those in the health, law, performing arts, athletics, financial, investment, accounting, actuarial science, and trading industries. In short – if you own a specified service trade or business (SSTB) and your income is above the threshold, your 20% deduction phases out until it peters off, completely.
In order to qualify for the Qualified Business Income Deduction, you must be regularly engaged in the income-generating activity of your business. But, what about the income generated from real estate rentals? If you want to claim a 199A deduction for your rental income there are a few stipulations.
Stipulations and Qualifications for Business Income
So, what is qualified business income from real estate rentals? The IRS details regulatory requirements for qualifying income from your rental activity.
The first step to qualifying your income for “safe harbor” is keeping separate accounting books for each rental property. You must also work at least 250 hours over the taxable year. And, you cannot do a triple-net lease. So, what’s that?
Property owners cannot claim a 199A deduction if the rental agreement dictates that the tenant pays for the upkeep of the building. Doing so is engaging in a triple-net lease. And, in doing this, you are disqualified from claiming a QBI deduction.
If you own real estate, and you own a business that you are actively participating in – which rents the property that you own – your rental income automatically qualifies for a QBI deduction. It might seem like double-dipping, but it isn’t. In fact, doing so ties it up, all neat-and-tidy, for the IRS.
In order to qualify your rental income for the qualified business income deduction, it must have provided rental services for at least 250 hours. But, be careful about utilizing any property for your personal use. The IRS denies “safe harbor” for income on properties that you use for more than 14 days in the year.
So, you cannot claim rental income on your 199A for your beach home or seasonal residence.
Can I Claim a QBI Deduction on My Income?
You are on solid ground if you are a business owner who runs the business on a day-to-day basis. If your generated income is below the threshold and comes from an approved source, you can claim a QBI deduction. And, at the end of the day, it means a free 20% deduction on your annual income.
You can make the most of your tax deductions if you know where to look. Need help determining what is qualified business income, and if your income qualifies for a 199A deduction? Call a business tax advisor to sort out your tax-deductible business income.