It's January 2020, so you (or better yet, your accountant) should be busy preparing your 2019 tax returns and starting to plan for tax year 2020.

As you can learn here and here, the Tax Cuts and Jobs Act (TCJA) went into effect in 2018, establishing a 20% qualified business income (QBI) deduction for passthrough businesses (sole proprietorships, LLCs, S-corps). The QBID lets you deduct 20% of your qualified business income, on top of the specific business deductions you can claim on your Schedule C or corporate tax return.

However, the IRS considers health professionals providing medical services directly to a patient or client a specified service business (SSB), limiting your ability to claim the 20% deduction. The same is true for many other professional services such as attorneys, architects, and engineers. For such businesses, the law established thresholds on taxable income where the 20% deduction begins to phase out, and limits beyond which it cannot be claimed at all.

In a bit of welcome news, the IRS has updated these limits for 2019, and again for 2020.

As a caveat, the following is intended to be informational, and a starting point for a conversation with your tax professional. It is not specific tax advice for anyone in particular.

As a more personal caveat, like in the above-linked articles, this is tax stuff, so I had to content myself with making it helpful. Making it fun is beyond me, sorry :).

The Original Thresholds and Limits for 2018

For the 2018 tax year, the taxable-income thresholds and limits were as follows:

• If you filed married-filing-jointly, your phaseout threshold was $315,000
• If you filed any other type of return, your phaseout threshold was $157,500
• If you filed married-filing-jointly, your QBID went awat for taxable income above $415,000
• If you filed any other type of return, your QBID went awat for taxable income above $207,500

The 2019 Thresholds and Limits

For tax year 2019, the IRS became slightly more generous (to account for inflation):

• If you filed married-filing-jointly, your phaseout threshold was $321,400
• If you filed any other type of return, your phaseout threshold was $160,700
• If you filed married-filing-jointly, your QBID went awat for taxable income above $421,400
• If you filed any other type of return, your QBID went awat for taxable income above $210,700

The 2020 Thresholds and Limits

For 2020, the IRS thresholds and limits increased again:

• If you filed married-filing-jointly, your phaseout threshold was $326,600
• If you filed any other type of return, your phaseout threshold was $163,300
• If you filed married-filing-jointly, your QBID went awat for taxable income above $426,600
• If you filed any other type of return, your QBID went awat for taxable income above $213,300

An Example of How This Could Play Out

Say you own a practice that had a 2019 qualified business income of $100,000, so you could expect a $20,000 QBI deduction. Let's also say that you file taxes as married-filing-jointly, and that your 2019 joint taxable income was $326,000. Had the IRS kept the 2019 thresholds the same as for 2018, your 20% deduction would have started to phase out. Instead, the updated threshold allows you to take full benefit of the 20% QBID.

The Bottom Line

The QBID calculations are very complicated, and best left to your accountant (or at least a tax-prep software package like TurboTax). The above is intended to alert you to something that may affect your ability to take full (or any) advantage of this 20% deduction, which you can discuss with your accountant.

If you'd like to see how financial strategy helps address these and other aspects of your personal and business finances, email me to set up a free, no-strings-attached strategy call. If you need a good small-business accountant, let me know and I'll be happy to connect you with our accountants.

Disclaimer

This article is intended for informational purposes only, and should not be considered financial advice. You should consult a financial professional before making any major financial decisions.