20% Business Tax Deduction Explained! (How the 199A Qualified Business Income Deduction Works)
Ladies, and gentlemen how y'all doin Mike the CPA here in today's, video we're gonna be covering the, most complex, new, tax, deductions, for business, owners and that is the, qpi. Deduction, or the qualified, business income deduction, also. Known as the, $1.99. A deduction. Now, learning all this stuff throughout the course of this year in 2018, was, borderline, torture. But, now I get the privilege of being able to torture all of you out there in the land the internet with all this new juicy. Tax knowledge. This. Is gonna be a two part series guys so in this first part we're, gonna cover this in great detail all, the theory the rules what, this, deductions all about and then in another separate. Video I'm gonna have an Excel, document with. Five, full-on, step by step calculation. Examples, that literally took me hours to put together that, I'm gonna be showing to you guys in the next videos of this series I'm, gonna have a link to that video down in the comment section down below and also in the description section of this video so make sure to be looking for it and without. Further ado there's a lot to cover here so let's go ahead and dive right into it do, you remember when you were back in math class and you had to learn an entire new section. Or entire new chapter on math that. Was completely, different than, the previous chapter, do you remember how hard that was well that is kind, of like, what this deduction is it's, a whole brand new frontier, attacks and it's, really different than any other area of tax so you really have to think of, it in that way it's a whole new set of rules and a whole new way to think about things so, you really need to take the time to wrap your head around it to understand it so let's go ahead and get started and I'll keep this video as short and, concise as, I possibly can. So. This do $1.99. A deduction, is stimming, of course from the tax cuts and Jobs Act right the, tax, cuts in Jobs Act was signed into law on December 22nd. And along, with this came the provisions section 199. A. These. New tax savings, are huge imagine. You're a business owner and imagine, your taxable business income is, $100,000. Now we know that the maxi, duction you can get is 20%, now. Pretend that came to you and I said hey mr. and mrs. business owner of your. $100,000. Guess, what because of these new tax rules. $20,000, of that is no, longer, subject, to federal, income taxes, that, is how powerful these deductions are now, let's discuss the more formal definition of, this so for the years beginning on January, first of 2018. All the, way through December 31st. Of 2025. This, deduction is going to be in play and basically, what it means is a taxpayer, other, than a corporation. Got that so if it does not account. For corporations. Is entitled. To a deduction equal. To, 20%, of the taxpayers. Qualified. Business, income, so, qualified business income is defined as the net amount of qualified, items, of income gain. Deduction, and loss with respect to a qualified trade. Or business that is effectively, connected, with, the conduct, of a business, within, the United States. One. Of the things that is going to affect the seduction, is capital, gains whether, there's long term or short term but you guys will see that later on within this video in terms of qualified, business income an area of caution is rental, real estate income they.
The IRS has not ruled one, way or the other or have, provided, guidance to let us know if they're gonna count that as, qualified. Business income which is really unfortunate since, we're getting close to the end of 2018, at the time I'm filming this video historically. Courts. Have ruled in different tax cases in the past that. Even, the ownership. Of a single rental property, could, constitute. Or qualify, as a trade or business you, know it's up to you as a taxpayer, to take the position you want to take on this I'm expecting. We're gonna see more guidance but just keep that in mind whether, you want to put, that account, that rental income as qualified business income or not on your 2018. Tax return. Let's. Talk about now what is not, qualified. Business income what is not, qualified, business income and that is dividend income any, interest. Income net. Gain from foreign currency transactions, income, from national, principle contracts, amounts. Received from an annuity, or really important items that point out here on this list of all of them is compensation, or wages so, your wages, whether, they're from your job or whether, you pay yourself wages from your own business they're, not going to be factored, into your, qbi, income. They, will if you own your own business and pay yourself wages, they. Will help factor, into your qbi deduction, but it's the wages, you pay yourself are not, gonna, factor, into your overall qbi, income, but a lot of people are asking if it's gonna add to your income for qbi purposes, and it's, not also, on this lesson so you guys can see is guaranteed payments guaranteed, payments are not included. In qbi. Income, calculation, the reason this is important, is because obviously. People want to have as high of a qualified, business income as possible, for this deduction because, the higher amount, their business income is the higher, the potential deduction, they could possibly get but, so that's why it's important, to know what. Items do not factor, in to qualified, business income as they're, listed here let's continue. This, one kind of came as a shocker to me but the question was do I need, to be active, in order to qualify for, this, qpi deduction, and the answer is no, at least that's how I understand, it unless things change but, so to the best of my knowledge the answer is no you not have to be active, in the trader business in order to qualify or, receive the deduction the one in a, proposed, riggs indicate, that the tax payers level of involvement in the business does, not matter, if they, meet the requirement, of IRC. Section, one and na they may be entitled to the deduction whether, they are passive, or active, within. The business so that's pretty cool now let's discuss some of the limitations, of this deduction the one minute a deduction, is limited to, 20%. Of, the, lesser of qualified. Business income or. Taxable. Income, after reductions, for any net capital gains short, term or long term but.
Before. The, 199, a deduction, is taken into consideration, so. I know I know it's confusing but just take take your time to study that and wrap your head around it we're gonna look at one quick example here right, now so you guys can understand what, we're talking about it turns out taxable, income this piece right here remember, your taxable income is generally, your adjusted. Gross income, minus your. Standard deduction or, itemized. Deduction, if you itemize so your AGI minus. Standard deduction or your itemized deduction equals, your taxable, income okay. Let's look at a calculation, example, and let's see if we can make more sense of all this stuff because it's very confusing when you read it out loud you have to I had to read this several times to, follow it okay we have our calculator on screen now now let's look at an example and put these rules in the place so, we have a taxpayer, married filing joint, with. A. $100,000. Of qualified, business income from their business so, that's $100,000. Right that's $100,000, of income right there so we're gonna add 100,000, then, this same person they also have. $100,000. In long-term capital gains so, we're gonna add another $100,000. Here so. Now their total income before. Deductions. Is 200,000, right so. Now they're, they, have $30,000. Of tax deductions let's, just pretend these are their itemized, deductions, so now from. This 200,000, we subtract 30,000, from that. So. This means their net taxable. Income in this example would be one hundred and seventy, thousand, dollars but, now we have to apply these set, of rules or this logic, in order to calculate our deduction, okay, so it's 20 percent of the lesser of either qualified, business income or. Taxable. Income after reduction for any net capital gains we when we first come down here we see that their qualified, business income is, $100,000. Correct so, we know what that is but, now we have to look, at it from the other angle so we know our net taxable, income is one hundred and seventy thousand dollars because. We just added all this stuff up and then took out the itemized deductions, so. But now we have to back, out long. Term capital, gain remember it's taxable, income after reduction. For. Any net capital gains so we, take one hundred and seventy thousand, as we have here and we subtract, out the, long-term capital gains of 100,000. So. Now this, is our net taxable, income after, capital. Gains have been taken to account so, now which number, is smaller the, hundred thousand, of qbi or this, seventy thousand well, if you have passed math class which I hope you did you know that seventy, thousand, dollars is the right number, so the 70 thousand dollars is smaller so, that is the number that, we have to use in order, to find out what our qualified. Business, income deduction, is so, we're gonna take seventy. Thousand, dollars and. We're gonna multiply that by twenty percent because, that's the max deduction, we can receive so. Our qpi deduction, in this example, the. Result is fourteen, thousand, dollars so, this taxpayer, can reduce their their, taxable, income by, fourteen, thousand, dollars and we're you're gonna see that show up and because I've looked at the 2018, draft forms it's, gonna be on line nine if I remember correctly and I'll put it up here on screen and it's, going to reduce, your taxable, income even further I know I went over that example. Pretty fast but, like I said you're, gonna have this handout you can download for free and you can re-watch this video anytime so, take time to study it just that's the best you're gonna learn this stuff is to, actually sit through it and work through problems for yourself if you really are hoping, to understand, it because I don't think there's another way it's like it's like math class you really do have to work problems, out to understand, how this all works. So. What businesses, and taxpayers qualify. For the $1.99 a deduction, so we know that if you're a partnership, you're. Eligible if you're an S corporation, you're. Eligible now remember I said corporations. Are not able, to take this deduction but.
I Met C corporations, if you're, an S corporation, which. Means you're a pass-through, entity then, you you are still allowed to take the deduction if you're a sole proprietor, so like if you're let's say you have a lawn mowing business and you just work for yourself, well then you would your, business would also fall under this category so, you you would be eligible to take it and or. If you're an AG cooperative, you can take it other, eligible, taxpayers include individuals, trust. And the states on that, note now let's talk about the people who don't get to take it remember C corporations, do not qualify if, you are an employee, I have to make this very clear because a lot of people asked about this you, do not get the deduction to qualify for this deduction you have to have ownership interest within a business. So. What is a qualified, trade or business that is the question you should be asking yourself so, every business is a qualified, trade or business as defined, under section, 199, a with. The exceptions, being the trade. Or business of performing, services as an employee, sorry, employees, you get screwed and any. A specified, service trade or business, sorry service businesses, they, don't like you either before. We get into all of that let's talk about some income limitations, if your, filing status is single you. Get the full twenty percent deduction if your, taxable income is less than one, hundred and fifty to seven thousand, five, hundred if you're, married filing joint, you get the full twenty percent deduction as, long as your taxable. Income is less than three hundred and fifteen thousand, and once, you go above these amounts then, the deduction starts. To phase out for you so, no, deduction, once your income exceeds, if your single two hundred and seven thousand five hundred so. Which is a fifty thousand dollar spread right here that's what this is is a fifty thousand dollar spread and now if you're married you have more room here it's, actually a hundred thousand dollar spread so you're, as long as you're within, this range you can still take the deduction I want to make a very clear here that once.
You're If you're in a specified, service business, which we're about to cover here in just a second then. Once. Your income is above this then. You can no longer take. Any deduction. For one ninety, nine eight so once you're over these amounts you're out of luck if you're, in a certain specified, service trader, business but. If you're if you're like a manufacturing, company or another kind of business, that, is not, a specified. Service trader business you, have some more leeway you have some more options even, if your income is above, these. Amounts, which, is pretty cool so, then there's another test it's called the income limitation, phase in and so, that they look at the limit. Is the greater of 50 percent of your w-2 wages or. 25. Percent of your w-2 wages plus, two, and a half percent of your on adjusted basis. This. I'm going to tell you is not going to make a lot of sense right now until, we actually look, at a full-on, examples. Of this in. The next part, of this series in. Excel that we're gonna do in the next video I'm, gonna let you guys read this part for yourself on screen I don't want to read every single line Adam - you guys - for sake of time but I'm. Basically here I'm explaining how there are exceptions, for deductions. If you're in a specified service, trade or business so go ahead and just take. Your time and read this for yourself it'll make a lot of sense now let's get into the important part of what if the heck is a specified, service business, and the. Acronym for these things guys there's two acronyms, out there and the. Acronyms are SS b or SS. T, b and i know what, you're thinking I know what you're thinking when I said that is you're thinking of STD. And it, sounds just like it well, specified. Service businesses, are SSB or SS TB, or bad. So if you if you have if you work within one, of these types of businesses they. Don't it this, deduction, is, not, your, friend it's not as friendly to you so, just like STD. Is bad if your, business is an SS B it's, bad because. There's limitations, to the deduction, you can take and that's kind of how I remember, some of this stuff I know, it's crazy but it helps it, this stuff is these. New rules or, bunkers. Now. Let's look at some examples, of these SS B's the specified, service trade or business if your business is in the field of law and you, are engaged. In the performance of legal services by attorneys, paralegals and other similar professionals, who, serve in a legal service capacity yeren, SSB, if you're, an accountant, hey that includes me.
Contents. Auditors enrolled agents and other similar professions are, considered. Service, types of businesses doctors. Pharmacists. Nurses those, are considered services performing. Arts actors, singers directors, for all of you out there who are aspiring to be famous youtubers, and make a living off of youtube our extra money from YouTube unfortunately. YouTube, based, on my, interpretation and this, definition would. Fall off I would. Fall under this specified, service trader business category, so, your, deduction, might be limited, so I'm gonna stop reading, this list you guys can read it in your own time read, through it there's a lot of different professions, that, would fall under this category as, specified, service trader business so, now that we've looked at some examples of that there's one more thing now that will make a lot more sense let's, go back up to this income. Limitation, thing which we were talking about up here so. Whether. Or not you're. In a specified. Service trader business or a different. Kind of business altogether the. Good part is as as long as your income is below, these. Amounts which, this is gonna be true for most people. So most people are gonna be able to get the full 20 percent deduction so, if you're single and your incomes under this and as, long as your if you're married filing joint, as long as your income is under this amount you're, gonna be able to get the full $1.99. A deduction, whether, you're in a service business or not, so that's the good news once your income, goes above these amounts if you're in one of those specified, service trader. Businesses, which we discussed, down here that's. Where your deduction, completely, stops you get no chance. To do the abduction after that but. If you're in a business that is not one, of these things right here if you're like a manufacturing, company then. There's some other tests, you can run under these income.
Love Other limit income, limitation, rules that might allow you to actually get a deduction, so. I hope that makes sense I know it's confusing but, it's gonna make a lot more sense in the next part of this series we're. Going over the theory here ladies and gentlemen so that when, we do do the calculations, the, numbers will make more sense because, if you don't know all of this stuff all of these rules the, calculations. Will make absolutely. No sense so that's why we're covering this first in the handout take the time or pause the video here to read more about specified, service trade or businesses I'm not going to read all this to you for sake of time alright, I think I'm gonna go ahead and stop the video right here I know I went over a lot of information very quickly remember. To download this handout for free it'll. Make a lot more sense I think you're gonna get a lot from just rereading, the handout watch, this video again and go, through this calculation example. Up here, that we covered just. To whet, your appetite, and then. Next, week in next week's video I'm gonna publish, five. Full. On calculation. Examples, so, it's very important, you study up on this think of this as a class your. Homework ladies and gentlemen so read up on this download, the spreadsheet and, study, this and then I'll see you again in next week's video if you, liked the video drop, a like make, sure to share this information with a friend especially a friend who's thinking, about starting to their own business or a, friend already has their own business I'm sure they would find this information helpful, because, this, is a new frontier attacks and CPAs. And professionals, are trying to learn this as well as business owners and if. You're new to money in life TV welcome, on, this channel our goal is to help you become fiscally, fit and, we do that by teaching finances. Investing. Taxes. And more on a regular, basis, so be sure to subscribe so you do not miss any of our future uploads, if, there was ever a year to find an accountant, if you're a business owner this, would probably be the year to do it if, you're if you have a complex tax situation, is to find out I see if seek out a CPA in your area who knows this stuff very well alright. Ladies and gentlemen I really look forward to reading your comments, I hope, you have a great week and I will see you in the next part of this series and then I think it's gonna start to make way more sense but. Until then, do your homework don't, let me down and I'll see you in the next one love you all peace. You.
2018-12-24 21:14
Glad to see "they" made it simpler. LOL Thanks, Mike!
Haha hi Tsx. I know so simple right ;) That is why I believe IRS stands for "Insanity reporting simplified" :)
Thanks Mike for sharing your knowledge and delivering it in digestible pieces that we can follow. You obviously invest a lot of time and effort in creating your videos. Please keep them coming.
Frank, thank you so much for your kind words. I will certainly keep them coming. I have a whole line up of tax videos coming up for the start of 2019. I generally release the bulk of my new tax videos each year during the months of Jan - April to coincide with tax filing season. Videos like this one that are very technical can take about 10 - 20 hours to produce from start to finish. I try very hard to make it easier for the average person to understand so thank you for noticing. Merry Christmas/ Happy Holidays Frank.
S corporation qualifies for QBI.
Tony Jhang that is correct. Thanks for clarifying.
Time Stamps: •(What is 199A?) What is the qualified Business Income Deduction: 2:10 •What counts as qualified Business Income : 3:10 • Is rental income qualified business income? 3:41 • What is NOT qualified business income? 4:20 • Do you have to be active in the business to receive the qualified business income deduction? 5:48 • 199A Qualified business income deduction limitations 6:28 • 199A deduction calculation example: 7:25 • What type of businesses qualify for the 20% 199A deduction? : 10:32 • What is a qualified trade or business? : 11:35 • Income limitation phase in explained : 13:08 • What is a specified service trade or business?: 14:35
Free download dropbox link to the word document shown in video can be found here: https://www.dropbox.com/s/k55x8s0lxfexyql/199A%20Handout.docx?dl=0
Merry Christmas! A whole lot of awesome info again Mike. Thank you. You knocked the wind out of me at 16:09 though LOL. Us YouTubers can't take the deduction for adsense earnings. I'm just hoping TurboTax calculates this one corretly for me.
Can you do a video on how to report youtube income for a beginner? like#43
What about the dividends from a REIT? Am I allowed the deduction for that income?
+Tony Jhang Thanks!
REIT qualifies
Jason, Merry Christmas brother! Thanks for your feedback. I think you will like part 2 even more. These technical videos take forever to produce lol. I was pretty bummed that YouTubers are considered SSB's ,but oh well that is how the cookie crumbles on this one. I would feel confident that Turbo tax will calculate it correctly, but by you watching this video, and the one i'm going to release next Sunday you will have a much better understanding of how this works so you will be able to tell if the software is calculating it correctly or not. You will have to do inputs for this for each business activity you have...like your YouTube,...your rentals, etc This will probably be the very last item you enter on your tax return, because in order for the software to calculate this correctly everything else must be entered first so it knows what you final taxable income is before the deduction is taken in account. Take care Jason. Cheers to making the most of 2019 despite the impending economic doom lol.
Hey Laughing Lion, hows it going! Merry Christmas. Thanks for the topic suggestion. That would be a great one to do, unfortunately it might take me sometime to get around to producing it so in the meantime.....here is what I would "suggest" I'm assuming your channel is not incorporated under a Corporation, LLC, S-corp, etc. I'm assuming you did not form a legal business entity. If you did than you would have to file a separate business return in addition to your normal tax return. At that point I would suggest going to see an accountant to have them help you with that. If you did not form a legal business entity .......If that is the case than you would be like me and considered to be a sole proprietor and would report your ad revenue income on 1040 SCH C. Either line 1 or line 6 (other income). I can't remember the business code off the top of my head, but within the SCH C instructions you can find it. I've linked the instructions below. Scroll through the instructions until you find the business codes. Just fyi - We are in the business of "internet publishing and broadcasting" as YouTubers. I had to research all this stuff last year for myself so that is how I know. Here is the form 1040 Schedule C: https://www.irs.gov/pub/irs-pdf/f1040sc.pdf Here are the instructions to the form schedule C. https://www.irs.gov/pub/irs-pdf/i1040sc.pdf Hope that helps. Show less
How are you Mike? Question, I'm a sole proprietor of a small hvac business , Under your knowledge, Do I qualify?
No problem HappyTemp. Have a great New Year! :)
+Money and Life TV Thank you for the reply Mr Mike
Hi Temp, Yes, you business would generally qualify for the deduction as long as you have a positive net business income, and your taxable income is below the threshold phaseout limitation amounts shown in the video. Great question.
@Babak here is a nice info summary on 199A and distributions from reits and ptps : https://mlaem.fs.ml.com/content/dam/ML/Articles/pdf/ml_BUSINESS-INCOME-WP.pdf
Thanks Tony for answering this one.
Hello your videos have been so helpful to me as I just started doing taxes this year it gives more confidence in this following tax season. I wanted to ask you which software is good for tax preparation?
Thank you so much Maria. I'm so glad to hear these videos are helpful. I learn a lot every time I produce one. It is a great refresher lol. A lot of tax professionals actually watch my tax videos. Tax software for professional tax prepares. You have numerous options available. These are the ones i'm most familiar with and what I would recommend based on your client base. For 1040 prep: I prefer Lacerte or Ultratax. Lacerte may be the cheapest option, but i'm not 100% sure. For business tax prep I prefer Ultratax or Prosystems. For estates and trust prep ( I prefer Ultratax or Prosystems. Each software has its limitations, but I from experience I feel that Lacerte and Ultratax or easier to use. ProSystems is the most advanced software that I know of, but it is not as user friendly. Hope that helps. Happy new year :)
+Money and Life TV thanks so much!!! I'll definately look into it... and again thank you for all this helpful videos. Happy new year!
Part 2 of 2 is here! 5 Examples (step by step) of how to calculate the QBI deduction: https://youtu.be/8nrxVVaw3NE The downloadable excel document can be found here: https://www.dropbox.com/s/36phs8rgsidw075/199A%20calculation%20examples%20%28protected%29.xlsx?dl=0
Im looking at it and like algebra my Eureka moment will come
Haha thanks Chester. Love your comment. It is a lot like learning math and some self study is certainly required to truly understand it. Part 2 has a lot of math involved :) Part 2 can be found here: https://youtu.be/8nrxVVaw3NE Cheers !
How is Taxable Income calculated? In the new Form 1040, Taxable Income is adding AGI + Section 199A deduction. It is circular logic.
Buzybill hows it going man?Thanks so much for asking this, because silly me I forgot to include it in the video. To avoid the circular logic the tax return has to be fully prepared before the deduction is taken into account. In other words calculating the 199A deduction would be the very last thing you do on your tax return. Also, the rules specifically state that taxable income is determined BEFORE taking the 199A deduction into account. Great question! Happy New Year!
Huge props and thanks to you for putting all this info into video form! I got about halfway through before I had to take a breather, but planning on coming back in. Thanks again, man. You're amazing!
Thanks so much Well behaved Wallet. Sorry I know its a lot to digest lol. But the rules are that complex. There is a 2 minute video on this subject somewhere on YouTube but it leaves about 75% of the details out so a person walks away thinking they know how this deduction works when they really don't. Thanks for the support and Happy new Year!
Awesome presentation! Part 2 is also amazing!
This might be the nicest thing anyone has ever said to me. Thank you so much Erika! Now please go have that beer :) lol
No, Mike, thank you. I've been preparing tax returns professionally since tax year 2002. I'm an EA. I've searched high and low for comprehensive explanations, and by far your series is the best I can find. I feel for you when you mention the innumerable hours spent trying to educate yourself on the topics at hand. I've spent several hours there myself, which is why I am so impressed with what you have put together. And the spread sheets, holy smokes, the time and effort you put in there is amazing. I've subscribed. I've also started watching other videos you have put out there... The AMT video was also great. And, yes, I think I could use a beer..
Thanks Erika! Thank you for watching both. I know its a lot of info to take in all at once, but i'm very happy to hear you found it helpful. After consuming this much tax law all at once I usually recommend people consume an alcoholic beverage to take the edge off.
+Money and Life TV Great videos! Would Turbotax be a good option if I'm only filing taxes for my business?
Is this also used for independent contractors?
Hi T Bell thanks for watching. Yes, this deduction is for business owners so if you are an independent contractor and work for yourself you could potentially qualify for this tax deduction.
Great explanation Mike! Thanks.
Thank you Ma S! I appreciate the feedback. I sunk a lot of time into this one haha.
Thank you very much for all the information.
No problem Leonor :) Thanks!
Thanks great information!!
Thank you Marianne! I put a lot of time into these two videos so I'm glad people are finding the information to be helpful.
Great video , fast and easy to understand!!
Thank you BabyBlue!
Great video dude!
SuperLocoloco69 thank you!
A small word of advice for those business owners out there. DO NOT, under any circumstances, try to calculate the QBI yourself. I am a tax practitioner of many years, and I have gone through several seminars on this new law and my head is still spinning. Many of the final regs have not even been written by the IRS, and the government shutdown has exacerbated that situation. Use an experienced tax prep firm, EA Practice or CPA firm to do your taxes this year. Those with no business are not affected by QBI and the tax law is much easier for these individuals.
can you give some examples of service businesses? Thats like most businesses lol what about like hair dressers, tax preparers, life coaches..none of that qualifies right?
Haha no problem Tracie :) Thanks for watching.
oh sorry I should have watched the whole thing first you answered it lol THANKS
What are your thoughts on the effects of QBI when it comes to EmployEE contributions vs EmployER contributions (e.g. in a Solo 401k)? Here is a quote from the IRS 199A regulations, ""the deduction for contributions to qualified retirement plans under section 404 are considered attributable to a trade or business to the extent that the individual’s gross income from the trade or business is taken into account in calculating the allowable deduction, on a proportionate basis to the gross income received from the trade or business." The words "attributable" and "proportionate" make me think that this language is referring to EmployER contributions and not EmployEE elective contributions. So in a real world example, if I have a solo 401k and want to contribute $10,000 into it for tax year 2018, the EmployEE contribution may not have an effect on my QBI, therefore giving me a full $10,000 worth of deduction, whereas a $10,000 EmployER contribution looks like it would lower QBI and would only be worth a $8.000 deduction (80%). I would appreciate your opinion on this. Thanks!
Hi Skotsman85, i'm not totally sure to be honest, but i think your thinking is correct. I don't think the Employee contributions would come into play as much as the EmployER contributions would impact the total QBI as far as i understand it. The QBI deduction is a really odd duck, because if you lower your taxable income it actually lowers your potential QBI deduction. Therefore (in a general sense) the only way to increase your QBI deduction is to increase your taxable business income which most people want to have "less' taxable income. Great question.
Hi, Does a bookkeeper fall under accountant in this rule?
Hi Charlene, yes, good question
I'm trying to my taxes and one of my side jobs was food delivery for both Grubhub and UberEats. Do these businesses qualify for QBI?
I am a retired EA and I would like to thank you for this video. A very clear and concise explanation of a typically unclear IRS ruling. Thanks.
Hi Jacob, love the question. Grubhub and UberEats would both be considered specified service businesses, however, if your income is under the threshold limits discussed in the video you should still be able to qualify for some form of the 199A QBI deduction (or perhaps the full 20%) depending upon your overall income.
Thank you for your kind words GreyRavenHawk :) I appreciate your feedback and the support. I'll have al ot more tax videos to come in the future.
Thank you. Getting as much info as I can. Then repeat repeat repeat. Takes a while for it to soak in. And most our clients have no idea about it.
Money and Life TV Lol. Think I’ll pass on the alcohol. Seems like enough alcohol has been partaken in creating these laws.
Hi Chris, thanks for watching. It took me a lot of study, but it sounds like you have the right idea. Lots of self study my friend. Hopefully followed by a lot of alcohol lol.
This is a test
Such a good explanation! Thank you
Haha so true, so true.
+Money and Life TV kjhjkl
Haha, John that was exactly how I felt when I was putting this video together.
Thanks Karla!
Thank you, great explanation and easy to understand.
Thank you Abdelaziz! Glad to hear this was easy to follow.
Do authors who get royalties from sales on Amazon qualify? I get a 1099 misc. from Amazon and they classify it as "royalties." The income is between 40 and 50 thousand.
Hi Consuelo, fantastic question. Wow that is impressive on the royalties. If you sale products on amazon than I think it would qualify to the best of my knowledge. I can't tell you with 100% certainty, but I believe it would qualify for the deduction. Certainly sounds like a business activity in my opinion, and if your total income is under the threshold amounts you shouldn't have a problem getting the full 20% QBi deduction on that income. Hope that helps. Thanks :)
How can a member of a 1120S increase their business income for the QBI deduction since W2 earnings are not included? Will distributions help with the QBI?
Hi Somes, good question. Distributions are not considered expenses so they would not increase or decrease your net business income. Distributions affect equity only and not the profit and loss statement. The QBI deduction is weird because the more business income you have the higher the 20% deduction you can get, however, if you have higher business income you get taxed on a higher taxable income. Deferring expenses/purchases is one simple way to increase your qualified business income, but I don't recommend it. Ultimately I still suggest people try to keep their net business income as low as possible even if it means getting a lower overall QBI deduction. Doing this usually yields the best overall tax result. Hope that helps, and thanks for watching :)
Awesome video and topic, and I haven't started watching. The IRS was no help, instructions sucked and no one knows. Post #2; watched it you did great! I'm still foggy though watching it the second time. I'm confused as a sole proprietor; I don't pay myself on a W2 however, I do take all money that is left over after expenses and taxes so does that count as my pay? I have a carpet cleaning (service) business, work alone and have no capitol gains, does the profit I keep/use for myself qualify? My income on the cleaning buis is
My guess after watching both vids would be; Yes carpet cleaning like the lawn business does qualify. With a AGI income of 40,000, no capitol gains, I could take the full 20% off my AGI? Or, 40k minus 8k making the new taxable income 32k. Adding back a rental property say 10k give a total taxable income of 42k. Sound right? Thought I'd save you time and provide a scenario. If it looks good you can just say yes or point out the no goes. Maybe most important is a carpet cleaning business allowed and or should I include the rental property taking they 20% off the entire 50k?
Is residential rental income qualify for QBI deductions?
Hi Dan, great questions. I can't give you a precise answer, because I do not have all the details in front of me, but here are my thoughts on your questions/situation: 1. As long as your overall adjusted gross income is under $157,000 or 315K (depending on your filing status) regardless of what type of business you own you would be able to get the full 20% 2. The 20% business deduction is based on the lesser of your net taxable business income or your taxable income. So if you carpet business nets 40K you should be able to receive about an $8,000 QBI deduction based on your circumstances. However, if your overall taxable income is lower than your business income than it will based on that number instead. For example: Lets say your Total AGI is $50,000 with your rentals. Your overall taxable income would be 38,000 (50,000 less your standard deduction of 12,000) = $38,000. The QBI deduction would then be calculated based on the $38,000 in this example vs the $40,000. So it all depends. Obviously these are just rough numbers because it is impossible for me to calculate without having all the numbers in front of me. This deduction has numerous layers of complexity. Don't take any of my numbers to be 100% accurate here as i'm just trying to explain how this stuff generally works. 3. Rentals may qualify for QBI depending on how actively involved you are in managing them, doing repairs, etc. Rentals are still a gray area, but they can qualify for QBI depending upon your level of involvement. Fantastic questions Dan. Hope that helps.
+Money and Life TV ; Yes you nailed it in your videos I used the AGI on the carpet cleaning after deductions. Watched a vid on the rental subject alone and he mentioned 250 hours so with just one rental I didn't include it. Thanks so much you're video's were by far the best on this subject, you and the videos were also enjoyable to watch.
Hi Movie, fantastic question. Yes, and no. In other words its a great area. It would depend on how actively involved one is in managing the property, doing repairs, maintaining the books, etc. I think this article will help. https://www.kitces.com/blog/irs-notice-2019-07-199a-qbi-deduction-250-hours-safe-harbor-rental-real-estate-business/ You can also look up "Notice 2019-07" which can be found on the IRS website or by doing a google search.
I wish I had watched this video 2 months ago
what if someone making >$150 thousand /year? Thanks so much for sharing your great knowledge.
I earn none employee compensation and pay self employee tax. Do I qualify? Thanks.
Better late than never as they say ;) Thanks for watching Zhou.
Hi KT if you file single and make less than $150K per year I would expect you could get the full 20% QBI deduction. The only thing I think that could reduce it would be if you had a lot of capital gain income.
Sounds like you are a sole proprietor, so yes, you likely qualify assuming your income is below the thresholds mentioned in the video, and you meet the other rules discussed.
im under a c corporation but single and file sole perpetrator
Hi TShirt, I think you mean you file a "Schedule C" as a sole proprietor? If so you can qualify for the QBI deduction. An actual C corporation would not qualify for the QBI deduction.
I have 3 1099s and 1 service business.... But my taxes are holding me up for not completing the qbi... From what youre saying I wouldn't qualify meaning I should put $0?
Hey Mike, new subscriber here. Due to a slight lack of the IRS being absolutely clear about all professions that may be an SSB it seems like there might be some contention between the IRS and and taxpayers. Especially with when they mention the word “trade” on both sides. By definition it’s a skilled job, typically one requiring manual skills and special training. How do you differ a qualified trade business and specified service business when they say an SSB is also any trade or business where the principal asset is the reputation or skill of one or more of its owners or employees? My question for you is about my job, I own a Body Piercing and Jewelry store. It’s a manual skill and specialized training but the business is based off my reputation..
How about $2M from commission for introduction of a commercial borrower to a commercial lender?
Q5. What is a qualified trade or business? A5. A qualified trade or business is any trade or business, with two exceptions: Specified service trade or business (SSTB), which includes a trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, investing and investment management, trading, dealing in certain assets or any trade or business where the principal asset is the reputation or skill of one or more of its employees. This exception only applies if a taxpayer’s taxable income exceeds $315,000 for a married couple filing a joint return, or $157,500 for all other taxpayers Performing services as an employee
What's going on Dan? Thanks for the support. Ya unfortunately there is a lot of grey area around this darn deduction. Are you under the income thresholds of 157K or 315K? If so you don't have to worry about being a specified service business. You can still get the full deduction as long as your total taxable income is below. This how the IRS defines the SSB from their website: For taxpayers with taxable income that exceeds the threshold amount, specified service trades or businesses (SSTBs). An SSTB is a trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, investing and investment management, trading, dealing in certain assets or any trade or business where the principal asset is the reputation or skill of one or more of its employees or owners. The principal asset of a trade or business is the reputation or skill of its employees or owners if the trade or business consists of the receipt of income from endorsing products or services, the use of an individual’s image, likeness, voice, or other symbols associated with the individual’s identity, or appearances at events or on radio, television, or other media formats. The SSTB exception does not apply for taxpayers with taxable income below the threshold amount and is phased in for taxpayers with taxable income above the threshold amount. For 2018, the threshold amount is $315,000 for a married couple filing a joint return, or $157,500 for all other taxpayers. The threshold amounts will be adjusted for inflation in subsequent years. Hope that helps.
Hi Edward, good question. Not 100% sure, but to my understanding commission income would be qualified business income. I think this article may provide some further guidance. http://www.mondaq.com/unitedstates/x/753286/Income+Tax/Qualified+Business+Income+Are+You+Eligible+For+A+20+Deduction+Part+II+Additional+Guidance You might also check out this link on the IRS website. https://www.irs.gov/newsroom/qualified-business-income-deduction
Odd. The H &R tax preparer told me yesterday that because my wife is a self employed dog trainer, she cant take this deductions. He stated that it is because she is in a service profession. Now im confused. Lol
+Money and Life TV thanks for the clarification.
Hi Jeffrey, sounds like that HR Block preparer may be wrong. If you file MFJ and your total income is less than $315,000 you can qualify for the deduction even though it is technically a "specified service business" Might look at amending that tax return if it has already been filed.
No problem Jeffrey. I hope you are able to get a larger deduction with the QBI.
https://www.lookchup.com/read-blog/882382
Very Clear! I. Like your explanation. Thank you
Thank you Feixiang :) I'll be producing more tax, and investing videos throughout the year so stay tuned :)
@Money and Life TV thanks for the clarification.
@Money and Life TV ; Yes you nailed it in your videos I used the AGI on the carpet cleaning after deductions. Watched a vid on the rental subject alone and he mentioned 250 hours so with just one rental I didn't include it. Thanks so much you're video's were by far the best on this subject, you and the videos were also enjoyable to watch.
@Money and Life TV kjhjkl
@Money and Life TV Great videos! Would Turbotax be a good option if I'm only filing taxes for my business?
@Money and Life TV thanks so much!!! I'll definately look into it... and again thank you for all this helpful videos. Happy new year!
@Money and Life TV Thank you for the reply Mr Mike
This was crazy but fun! You made it so interesting. Keep up the good work. Im glad I found this video.
Thanks Jozette, that means a lot. Some of this stuff is so dry but I do my best to make it interesting.
Hows it going everyone. I'm publishing this video on Dec 23rd of 2018 so Happy Holidays/Merry Christmas to all of you. Thank you so much for your support and for continuing to CRUSH that like button. I will release the 2nd and final part to this series on Sunday 12/30/18 (Just before tax season) Once I have that next video ready I will post a link to it here in the comments and in the description section of this video. Between this video and part 2 coming out next week these are by FAR the most technically complex tax videos I have ever produced on this channel. I hope you get a lot of these videos. I've went to numerous professional level courses on this stuff throughout 2018. This is the most complex new area of tax law in years. I just hope I was successful at taking these complex rules and explaining it in a way that the average person can understand. Lots more tax and investing videos to come in 2019. Have a great week everyone. Live life uncaged!!