Dental Bites: Qualified business income deduction

This is part two in a series that examines how tax reform impacts businesses and individuals operating in the dental industry. The series will be released over the next several months and will provide explanations and insight into the changes being made and how those affected can maximize the benefits of these changes. The first topic is the qualified business income (QBI) deduction. In August, the Treasury Department issued proposed regulations covering many aspects of the QBI deduction. These rules are complex and we recommend discussing any tax planning strategies with your tax advisor prior to making any changes.

Overview: Beginning in 2018, taxpayers may be eligible for a 20 percent deduction on QBI from a partnership, S corporation or sole proprietorship. The deduction is calculated at the individual level and taken by the taxpayer on their individual tax return. The deduction is subject to limitations based on wages paid by the business generating the QBI, or wages plus a capital investment element for the business. The QBI deduction is also subject to phaseout for taxpayers engaged in specified service trades or businesses (SSTBs), which include medical and dental practices. The phaseout is based on the individual’s taxable income reported on federal Form 1040.

Definitions

Qualified business income: QBI is defined as income or loss from any qualified trade or business during the tax year. QBI does not include interest, dividends, capital gains/losses or compensation paid to the taxpayer from the practice through wages or guaranteed payments.

Deduction phaseout: For taxpayers at or below the section 199A taxable income thresholds ($157,500 for single filers, $315,000 for joint filers), income from an SSTB is eligible for the deduction. Above these amounts, the deduction is phased out over a range of $50,000 - $100,000. Taxpayers with taxable income that exceeds $207,500 (individual) or $415,000 (joint) are not eligible for the section 199A deduction on their SSTB income.

Wage limitation: The QBI deduction the taxpayer will receive is limited to the lesser of 20 percent of QBI or 50 percent of the taxpayer’s share of qualified wages paid by the qualified trade or business. Qualified wages include those subject to withholding (W-2 wages including officer wages), elective deferrals and any deferred compensation paid in that tax year. This limitation applies when a MFJ taxpayer’s taxable income is in excess of $315,000 ($157,500 for single filers).