Small and midsized businesses in Illinois and across the country will still be able to take advantage of key provisions of tax law affecting pass-through income in 2021. Despite the apprehension many may have felt at changes to current tax law to pay for major increases in federal spending, the reduction in tax liability for small businesses that became law in 2017 will remain.
As most businesses and self-employed taxpayers in this country have business income that they report on their personal tax return, the qualified business income deduction (QBI) has been a valuable perk that has kept many businesses afloat through hard times. With changes to tax laws coming up, residents of Madison County may wish to explore strategies that will help them minimize tax implications and avoid compliance issues.
The QBI deduction and who is eligible
The QBI deduction gives self-employed and small-business owners the opportunity to deduct up to 20% of their qualified business income on their taxes. Eligible entities include sole proprietorships, partnerships, S corporations and LLC’s, as well as some trusts and estates.
The deduction applies to qualified business income, which is basically the business’s net profit. However, QBI does not include:
- Interest income
- Capital gains or losses
- Dividends
- Income earned outside the United States
- Wage or guaranteed payments to partners or shareholders
For 2020, individuals or businesses whose total taxable income, including business and other income is below $163,300 for single, $326,600 for joint filers qualify for the 20% deduction. These numbers will increase to $164,900 for single, and $329,800 for joint filers.
For those whose income is above these limits, eligibility for the pass-through deduction depends on the nature of the business. Because some QBI deductions phase out for some businesses, the full 20% deduction may not be possible.
Two ways to deduct
The QBI deduction is possible whether the taxpayer itemizes on Schedule A or the standard form, and they may claim two deductions:
- Up to 20% on pass-through income, depending on the type of business or the type of W-2 wages the business owner pays
- Up to 20% of qualified real estate investment trust (REIT) dividends or qualified traded partnership (PTP) income, depending on the business
The limit of the deduction is the lesser of 20% of taxable net capital gain or the QBI and REIT/PTP combined.
