The Tax Cuts and Jobs Act (TCJA) made the qualified business income (QBI) deduction one of its cornerstones.
Through 2025, the QBI write-off is available to eligible individuals, estates, and trusts. But here we will focus on individuals.

Because the QBI deduction is scheduled to disappear after 2025, taking steps to maximize the write-off while it’s still on the books seems like a good idea. In other words, use it before lawmakers allow it to go away.

Here’s what you need to know to do that, starting with some necessary background information.

QBI Deduction Basics

The QBI deduction can be up to 20 percent of:

• QBI earned from a sole proprietorship or a single-member LLC that’s treated as a sole proprietorship for federal income tax purposes, plus
• QBI from a pass-through business entity, meaning a partnership, a multi-member LLC that’s treated as a partnership for federal income tax purposes, or an S corporation.

You can also claim a QBI deduction for up to 20 percent of qualified dividends from real estate investment trusts
and up to 20 percent of qualified income from publicly traded partnerships.

The QBI deduction does not reduce your adjusted gross income (AGI). In effect, it’s treated the same as an
allowable itemized deduction.

The QBI deduction does not reduce your net earnings from self-employment for purposes of the self-employment
tax, nor does it reduce net investment income for purposes of the 3.8 percent net investment income tax.

What Counts as QBI?

QBI means qualified income and gains from an eligible business reduced by related deductions and losses.

According to the IRS, QBI from a particular business is reduced by:

• the allocable deduction for a retirement plan contribution,
• the allocable deduction for 50 percent of self-employment tax, and
• the allocable deduction for self-employed health insurance premiums.

Income from being an employee does not count as QBI.

Salary that you collect as an S corporation shareholder-employee does not count as QBI either. Ditto for salary that
you collect as a C corporation shareholder-employee. Also, ditto for guaranteed payments that you collect as a
partner, or as an LLC member treated as a partner for tax purposes, for services that you render to a partnership or
an LLC.

QBI Deduction Limitations

At higher income levels, unfavorable QBI deduction limitations can come into play. These can potentially affect the QBI deduction claimed on your 2023 Form 1040, if you’ve not yet filed it, and the QBI deductions that you will claim on your 2024 and 2025 returns.

For 2023, the limitations begin to phase in when your taxable income (calculated before any QBI deduction) exceeds $182,100, or $364,200 for married joint-filing couples. The limitations are fully phased in once taxable income exceeds $232,100 or $464,200, respectively.

For 2024, the limitations begin to phase in when your taxable income (before any QBI deduction) exceeds
$191,950, or $383,900 if you’re a married joint-filer. The limitations are fully phased in once taxable income exceeds $241,950 or $483,900, respectively.

If the applicable fully phased-in threshold is exceeded and you do not operate as a specified service trade or business (SSTB), discussed below, your QBI deduction is limited to the greater of:

• your share of 50 percent of W-2 wages paid by the business in question to employees during the tax year and properly allocable to QBI, or
• the sum of your share of 25 percent of such W-2 wages plus your share of 2.5 percent of the unadjusted basis immediately upon acquisition (UBIA) of qualified property.

The limitation based on the UBIA of qualified property is for the benefit of capital-intensive businesses such as manufacturing or hotel operations.

Qualified property means depreciable tangible property (including real estate) that

• is owned by a qualified business as of its tax year-end,
• is used by that business at any point during the tax year for the production of QBI, and
• has not reached the end of its depreciable life as of the tax year-end.

The UBIA of qualified property generally equals its original cost when it was first put to use in the business.

Finally, your Section 199A deduction is the lesser of your

• Taxable income (reduced by net capital gains and qualified dividends), or
• QBI.

Special Unfavorable Rules for Some Service Businesses

If your operation is an SSTB, your QBI deduction begins to be phased out when your taxable income (calculated before any QBI deduction) exceeds the applicable threshold as defined above.

If your taxable income exceeds the applicable complete phaseout number, you are not allowed to claim any QBI deduction based on income from any SSTB.

What Counts as an SSTB?

In general, an SSTB is any trade or business involving the performance of services in one or more of the following
fields:

• Health, law, accounting, and actuarial science (architecture and engineering firms aren’t considered SSTBs)
• Consulting
• Financial, brokerage, investing, and investment management services
• Trading
• Dealing in securities, partnership interests, or commodities
• Athletics and performing arts
• Any trade or business where the principal asset is the reputation or skill of one or more of its employees or owners

Before the IRS issued regulations on the subject, there was concern that the last definition could snare
unsuspecting businesses such as local restaurants with well-known chefs. Thankfully, the regulations limit the last
definition to trades or businesses in which you:

• receive fees, compensation, or other income for endorsing products or services;
• receive fees, licensing income compensation, or other income for the use of your image, likeness, name, signature, voice, trademark, or any other symbol associated with your identity; and/or
• receive fees, compensation, or other income for appearances at an event or on the radio, television, or another media platform.

Maximize Your QBI Deduction with Planning

Remember, as our beloved Internal Revenue Code reads right now, the QBI deduction is essentially a use-it-or-lose-
it deal because it’s scheduled to disappear after 2025. Congress could extend it, but you probably shouldn’t
bet on that happening.

So, what can you do to maximize QBI deductions through 2025? Here are four ideas to consider:

1. Aggregate Businesses

If your taxable income is high enough to be affected by the limitations based on W-2 wages and the UBIA of
qualified property, electing to aggregate businesses can allow you to claim a larger QBI deduction than if the
businesses are considered separately.

Key point: You cannot aggregate an SSTB with any other business, including another SSTB.

2. Forgo Big First-Year Depreciation Deductions

Generous first-year Section 179 deduction rules are on the books.

For tax years beginning in 2023, the maximum Section 179 deduction is $1.16 million.

For tax years beginning in 2024, the maximum deduction is $1.22 million.

In addition, 80 percent first-year bonus depreciation is available for eligible assets placed in service in 2023. For
2024, the bonus depreciation percentage drops to 60 percent, and it’s scheduled to drop to 40 percent for 2025.

Big first-year depreciation deductions are usually a good thing. But they reduce your QBI, which is not a good thing.
On the other hand, first-year depreciation deductions also reduce your taxable income—which could reduce the
impact of the unfavorable QBI limitations explained earlier.

So, you may have to thread the needle with depreciation write-offs to get the best overall federal income tax result.

Key point: As mentioned earlier, the QBI deduction is probably a use-it-or-lose-it deal. In contrast, when you choose to forgo big first-year depreciation deductions, affected assets will be depreciated over a number of years under the “regular” MACRS depreciation rules. If tax rates go up, regular depreciation deductions claimed in future years could turn out to be worth more than big first-year depreciation deductions claimed in earlier years.

3. Forgo Big Deductible Retirement Plan Contributions

According to the IRS, deductible retirement plan contributions that are allocable to a business that generates QBI will reduce your allowable QBI deductions. That’s unhelpful.

But they also reduce taxable income—which could reduce the impact of unfavorable QBI limitations. Of course, all things being equal, lower taxable income is a good thing. So, once again, you may have to thread the needle with retirement plan contributions to get the best overall federal income tax result.

Key point: Making contributions to a traditional IRA or Roth IRA will not have any negative impact on your allowable QBI deductions.

4. Use Married Filing Separately Status

Say you are a married individual who operates a small business that generates QBI. It pays no W-2 wages and has only a tiny amount of UBIA of qualified property. If you and your spouse file jointly, your combined taxable income will be high enough to greatly limit or even wipe out any QBI deduction, thanks to the limitations explained earlier.

But if you and your spouse file separate returns, you could potentially qualify for a nice QBI deduction on your separate return, because the QBI deduction limitations will not come into play or will be only partially phased in on your Form 1040.

Reality check: Filing separate returns to maximize the QBI deduction can have negative side effects that could make separate returns a bad idea. But you never know. Run the numbers to find the truth.

Impact on Unfiled 2023 Returns and 2024 Returns

For yet-to-be-filed 2023 returns, consider the planning ideas presented above before finalizing your returns.

For 2024 returns, there’s plenty of time to consider the same ideas.

Takeaways

The QBI deduction, introduced by the TCJA, is a valuable opportunity for business owners, offering up to a 20 percent deduction on eligible income.

Unfortunately, this benefit is scheduled to sunset after 2025, making it sensible to maximize the deduction while it’s still available.

Key to taking full advantage of the QBI deduction is understanding the qualifications and limitations that apply. The deduction is available to sole proprietors, partnerships, S corporations, and other pass-through entities, but it does not reduce AGI or self-employment tax liability.

High-income earners may face additional restrictions, particularly if they own an SSTB, which could completely phase out their deduction at certain income levels.

To maximize the QBI deduction, consider strategies such as aggregating businesses to combine income and W-2 wages for a larger deduction, and carefully managing depreciation deductions and retirement contributions to avoid unnecessarily reducing QBI. Filing separately in some cases may also increase your QBI deduction, but it comes with potential drawbacks that require a thorough analysis.

Ultimately, the QBI deduction represents a use-it-or-lose-it opportunity through 2025, so it’s wise to engage in proactive tax planning to maximize this temporary tax break while it’s still on the books.