The Qualified Business Income (QBI) deduction, created under the Tax Cuts and Jobs Act, allows eligible business owners to deduct up to 20% of their qualified business income. This deduction is designed to reduce your effective tax rate on profits but maximizing it requires strategy and not just filing at tax time.
Key Facts About QBI
- Qualified Business Income (QBI): Net income from your trade or business, excluding items like capital gains, dividends, and most interest income.
- Eligible Entities: Sole proprietorships, partnerships, S-corps, and some LLCs. C-corps do not qualify.
- Income Thresholds: Below certain income levels, you may receive the full 20% deduction. Above them, limits apply—especially for Specified Service Trades or Businesses (SSTBs) like law, consulting, and healthcare.
- W-2 Wages & Property Basis: For higher earners, deductions may be capped by wages paid or qualified property owned.
Why QBI Alone Isn’t Enough
Simply qualifying for QBI doesn’t guarantee maximum savings. Effective tax planning is the key to unlocking its full potential. With a strategic approach, you can:
- Select the best entity structure (LLC, S-Corp, etc.)
- Control income timing to stay under key thresholds
- Identify other deductions and credits
- Structure W-2 compensation to work with QBI rules
In short, QBI provides the benefit, but tax planning ensures you capture it.
Strategies to Maximize Your QBI Deduction
- Choose the Right Entity – An S-Corp may offer more flexibility than a sole proprietorship.
- Manage Taxable Income – Defer income or accelerate expenses to stay below thresholds.
- Use W-2 Wages & Property Basis – Pay reasonable wages and invest in qualified property to avoid limits.
- Account for SSTB Rules – If you’re in a service business, plan carefully to avoid losing deductions.
- Time Deductions Wisely – Align expenses and revenue for the best tax outcome.
- Maintain Records – Payroll, property, and expenses must be well documented.
QBI Deduction Example in Action
Jane, a consultant earning $400,000 with $100,000 in expenses, has $300,000 in QBI. On her own, SSTB rules would limit her deduction. With planning, she:
- Converts to an S-Corp, paying herself $100,000 in wages.
- Invests in depreciable property to boost the QBI calculation.
- Times expenses to reduce taxable income.
Result: a much larger deduction and significant tax savings.
Take Action
To maximize your QBI deduction:
- Get a tax plan. Abundant Returns’ Tax Planning service helps you build a year-round strategy.
- Engage business consulting. Abundant Returns’ Business Consulting can streamline operations and financial decisions for tax efficiency.
- Model scenarios. Test the impact of new hires, investments, or entity changes.
- Track everything. Good records protect your deductions.
