There are so many ways to save people money, and finding new and unique ones is the best part of our job.
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It’s incredible how many business owners don’t know about the different tax-saving opportunities that are available to them annually. QBI is one of these tax hacks that is underutilized yet incredibly valuable.

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Small to midsize business owners need to know about Qualified Business Income deduction optimization—a crucial end-of-year tax planning technique that Better Bookkeeping uses with our clients to save hundreds of thousands of dollars annually.

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The Qualified Business Income deduction was part of the Tax Cuts and Jobs Act of 2017. When Congress lowered the corporate tax rate to 21%, they also threw a bone to small businesses by offering a 20% deduction on qualified income. This tax break opportunity applied to Schedule C and pass-through entities as well.

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This new rule made it possible for anyone conducting business or trade out of a pass-through entity eligible to take a 20% deduction on their income. It’s a great opportunity that you may qualify for yourself, but before you start doing your happy dance, you need to understand the limitations and rules surrounding it.

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For 2023, the phase-out threshold begins at 364k for married and 182k for single/HOH.

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If your taxable income is above that threshold you are allowed to deduct the lesser of:

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• 20% of QBI, or…
• 1/2 W-2 wages, or…
• 1/4 W-2 wages + 2.5% unadjusted property basis (Real estate pros, look here).

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This means there is a wage limitation to your QBI deduction.

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A simple example of this: A married S-corp owner makes $300k after he pays employees. He is able to deduct $60k.

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Here are some tips for higher-income earners to maximize this tool:

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1. Reduce your income for SSTB, or Specified Service Trade or Business. This mostly works best in a single-employee S-Corp or closely held partnership. If you know that you are nearing the 326k income threshold for phaseout there are some things you can do to tamp down your income including retirement contributions.

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2. Make employee deferrals. Because salaries are ineligible for QBI anyhow, make deferrals out of the employee side through a 401k if you are eligible. This is more tax efficient.
   
   
3. Don’t contribute to SEP. Because you are already getting a 20% deduction, any contributions made to your SEP (Simplified Employee Pension Plan) or any other profit-sharing contribution would really only be 80% of what it was. Then, when you go to pull it out, you will pay tax on the full dollar.
   
   
4. Aggregation. Don’t forget to aggregate businesses that cooperate with common ownership and management. This will save you plenty of headaches because you won't have to optimize entity by entity.
   
   

Optimizing for taxes can save hundreds of thousands of dollars. Small business owners need all the help they can get in a world that always seems against them. Reach out to the Better Bookkeeping team to learn more about how we can optimize QBI for you.

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