What Exactly is Qualified Business Income and Why Does it Matter?
When you're trying to get your business operational, funding can be a big part of what makes or breaks your business plan. However, government incentive programs, such as the Tax Cuts & Jobs Act (TCJA), can include a wide range of confusing terminology that makes it difficult to determine whether your business qualifies for the program you're considering. One term that often confuses business owners, especially in the TCJA, is Qualified Business Income, which applies to the pass-through deduction. What does that mean and how do you figure out if you meet minimal requirements? Find out here:
Also called the Section 199A Deduction, the pass-through deduction applies usually to sole proprietors and businesses who have pass-through businesses. This can include some trusts and estates. It's called pass-through because the business doesn't pay taxes on the income, the business owner does. The income passes through the business and is reported on the owner's personal income tax return. Generally, if the pass-through taxable income is below a particular threshold, currently $315,000 for joint returns and $157,500 for single taxpayers, you are able to take a deduction of up to 20% of your qualified business income.
If you're above that threshold, you're subject to some limits and exceptions. These are determined by occupation and a limit based on wage and capital. In this case, you'll need to compare that 20% possible deduction against the greater of either half of W-2 wages for your trade or business, or by adding 25% of W-2 wages as well as 2.5 % of the unadjusted bases at the acquisition time of all qualified property. Then use this information in the appropriate formulas provided by the IRS.
By having a better grasp of what terms like Qualified Business Income mean, it's much easier to determine whether your business qualifies for government incentive programs. These programs, such as the TCJA, can help make the difference in your startup business funding and budget. If you need help with figuring out whether your company meets program requirements or need help with your accounting to determine accurate numbers for an application, the professionals at AccountRely can help. Please feel free to contact us today to get started.