By: Laurie Daugherty, Enrolled Agent – Senior Accountant, Osborne Rincon CPAs
Running a small business parallels the complexities of solving a Rubik's Cube, where strategic planning and precise actions can lead to financially-successful outcomes. A skilled accountant can analyze a business's financials from various angles – much like examining all sides of a Rubik's Cube – to identify the best moves to maximize deductions and utilize tax credits.
Qualified Business Income Deduction
One significant tax relief measure is the Qualified Business Income Deduction (QBID). It allows sole proprietorships, real estate investors, K entities and S Corporations to claim a deduction of 20% of qualified business income for each qualified business owned by the taxpayer. The QBID is taken on the individual income tax return after the calculation of adjusted gross income, and is available regardless of whether taxpayers itemize deductions on Schedule A or take the standard deduction. However, certain thresholds, phaseouts and limitations apply.
The QBI deduction is affected, A) by the type of business a taxpayer engages in, and; B) by the form of entity the taxpayer uses to conduct the business activity. Depending on the taxpayer’s circumstances, different forms of business entities will result in significantly different QBID deduction amounts based on the following:
· the taxpayer's total taxable income;
· the specific type of trade or business activity;
· the total amount of W-2 wages paid in connection to the business activity; and
· the unadjusted basis immediately after acquisition (UBIA) of qualified property used in the business.
If the business is a specified service trade or business (SSTB), which includes fields like law, health, consulting and financial services, the deduction may be phased out or disallowed entirely depending on the owner's taxable income.
Proactive Tax Planning is Critical
To optimize the QBID, an accountant may consider various strategies that align with the Internal Revenue Service (IRS) regulations. For instance, ensuring the total taxable income remains below the threshold of $191,950 for single filers and $383,900 for joint filers in 2024 is crucial for qualifying for the full deduction.
If the income surpasses these limits, the deduction may be subject to limitations based on the type of trade or business, the amount of W-2 wages paid, and the unadjusted basis immediately after acquisition (UBIA) of qualified property held by the trade or business.
Income reduction strategies may involve deferring income or accelerating expenses to stay below the income threshold. This could include timing the recognition of income to occur in a year with lower overall earnings or prepaying expenses to reduce taxable income in the current year.
Additionally, accountants might explore strategies which involve transforming specified service business income into non-specified service business income, thereby potentially qualifying for the QBID under different criteria.
Another approach is to increase the W-2 wages paid by the business, as the QBID for higher-income earners is partially determined by the W-2 wages paid by the business. Paying sufficient wages, giving year-end bonuses, or aggregating pass-through entities can be effective measures to fully utilize the 20% QBID.
While the financial management of a small business can be as challenging as solving a Rubik's Cube, with the right strategies and expert advice, it is possible to align the pieces to achieve significant tax savings through the QBID. Business owners should engage in early and ongoing tax planning to ensure they are positioned to take full advantage of this and other tax deductions available to them. Contact Osborne Rincon CPAs at 760-777-9805 to consult with a member of our team about these issues and how they might affect your business.
Laurie Daugherty is a Senior Accountant with Osborne Rincon CPAs. She obtained her Enrolled Agent License in 1999, and graduated in 2022 from William Howard Taft University with a Master of Science in Taxation. She started her accounting career in 1992 as a controller in a manufacturing/engineering company, then moved into taxation in 1997. Laurie has over 25 years of experience in individual, business and trust taxation.