Here's something I wrote regarding the Qualified Interest Business Deduction:
The GOP tax reform bill is expected to be signed into law by the end of this week, Dec. 22nd. The Qualified Business Income Deduction (QBID), part of this legislation effective for the 2018 tax year, allows qualifying pass-through entities to reduce their business income by up to 20%. QBID will be the focus of the post as it is of interest to dentists. For good summary of the tax reform bill, please read the following Business Insider article:
http://www.businessinsider.com/trump-gop-tax-reform-bill-details-corporate-tax-rate-brackets-2017-12
This discussion will be from the prospective of a dentist, either paid as a 1099 independent contractor or practice owner, who's formed a pass-through entity (i.e., S Corp, LLC, sole proprietor).
QBID General Overview
QBID allows qualifying pass-through entities to reduce their business income by up to 20%. Qualifying for QBID is based on the individual's taxable income:
Collections
less: Practice expenses (including owner's W2 wages)
less: Retirement contributions
less: HSA contributions
less: Standard or Itemized Deductions (the greater of)
equals: Taxable Income
As it may now be more evident, managing your taxable income is critical. Maximizing your allowable deductions to minimize your taxable income may determine whether you qualify for the QBID.
How to Calculate the QBID?
Let’s assume that your table income falls within the thresholds. Further assume that your practice ordinary business income (line item #21 of the 1120S or line item #1 of the K1) is $185,000. QBID is:
Now what? Well, for the 1st time, you can reduce your ordinary business income by $37,000 in this example. Given the new marginal tax brackets for married filing jointly, the estimated tax saving at the 24% marginal tax rate is $8,880 ($37,000 x 24%). This because of the new tax treatment for pass-through tax entities.
The GOP tax reform bill is expected to be signed into law by the end of this week, Dec. 22nd. The Qualified Business Income Deduction (QBID), part of this legislation effective for the 2018 tax year, allows qualifying pass-through entities to reduce their business income by up to 20%. QBID will be the focus of the post as it is of interest to dentists. For good summary of the tax reform bill, please read the following Business Insider article:
http://www.businessinsider.com/trump-gop-tax-reform-bill-details-corporate-tax-rate-brackets-2017-12
This discussion will be from the prospective of a dentist, either paid as a 1099 independent contractor or practice owner, who's formed a pass-through entity (i.e., S Corp, LLC, sole proprietor).
QBID General Overview
QBID allows qualifying pass-through entities to reduce their business income by up to 20%. Qualifying for QBID is based on the individual's taxable income:
- For married couples – taxable income cannot exceed $315,000. QBID is phased out from $315,000 to $415,000. If your taxable income exceeds $415,000, you will not qualify of any QBID.
- For single individuals – taxable income cannot exceed $157,500. QBID is phased out from $157,500 to $207,500. If your taxable income exceeds $207,500, you will not qualify for any QBID.
Collections
less: Practice expenses (including owner's W2 wages)
less: Retirement contributions
less: HSA contributions
less: Standard or Itemized Deductions (the greater of)
equals: Taxable Income
As it may now be more evident, managing your taxable income is critical. Maximizing your allowable deductions to minimize your taxable income may determine whether you qualify for the QBID.
How to Calculate the QBID?
Let’s assume that your table income falls within the thresholds. Further assume that your practice ordinary business income (line item #21 of the 1120S or line item #1 of the K1) is $185,000. QBID is:
- 20% of the ordinary business income, or $37,000 (20% of $185,000)
Now what? Well, for the 1st time, you can reduce your ordinary business income by $37,000 in this example. Given the new marginal tax brackets for married filing jointly, the estimated tax saving at the 24% marginal tax rate is $8,880 ($37,000 x 24%). This because of the new tax treatment for pass-through tax entities.
