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  • Vanessa Gonzalez-Penaloza

What is the QBI Deduction and How Can We Leverage it?

As a real estate agent or broker finding ways to reduce your tax bill for the year is important. Especially in a very active market!


Former President Trump, created the Tax Cuts & Jobs Act of 2017 which has given many people in the real estate industry a lot to think about.


You see, under this act, major tax changes have taken place which include a nearly doubled standard deduction, new limitations on itemized deductions, reduced income tax rates, lowering the corporate income tax rate to 21% and reforms to several other provisions.


In addition, the Quality Building Income Deduction (QBI) was created.


Well what is it? How does it work? And how can we make sure we get every possible deduction from this provision?


Let me take you through some of the basics and answer those questions.


WHAT IS THE QBI DEDUCTION?


The Quality Building Income Deduction (QBI) helps to lower taxable income and allows sole proprietors, partners of a partnership, shareholders in S-Corporations to deduct up to 20% of their business income.


What does that mean?

Well, it’s essentially your share of the profits from your business, which can be utilized to qualify for a deduction, through retirement plans and different planning strategies. This gives you additional options to save money at tax time and helps you avoid overpaying Uncle Sam.


But in order to qualify for this type of deduction, there’s a few qualifications that first need to be met:


  1. Only domestic businesses' income are eligible.

  2. Certain fields or trades can affect your available deduction.

  3. There’s a maximum possible deduction limit once you reach a certain taxable income threshold. For example, once your taxable income exceeds $163,300 for single filers or $326,600 for married couples filing jointly the wage limitation is lower than 20%.

  4. Taxable income can only be from qualified REIT dividends, certain pass-through entities and qualified PTP income or loss.


It can be a bit confusing, so let’s take a deeper dive into the QBI deduction and how we can leverage it.


HOW CAN YOU UTILIZE QBI DEDUCTION?


There’s many adjustments to the basic profit or loss amounts in order to figure out the QBI.

Once you figure out if your taxable income qualifies, you must then reduce that income or deductions through your business related income.

For instance,

  • Gains from transactions reported on Form 4797;

  • Deductions for ½ of self-employment tax;

  • Deduction for self-employed health insurance;

  • Deduction for contributions to a self-employed SEP, SIMPLE, or other qualified retirement plans;

  • Unreimbursed partnership expenses that are claimed by a partner on his/her personal return.

The above is just a fraction of what is needed to figure out the QBI deduction. But the QBI Deduction is a great way to reduce your tax liability.


Reaching out to an expert who can help guide you to see if your business qualifies is always the best way to start your journey.


Contact me for help today!


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