Most businesses qualify for the QBI deduction. There are some exceptions that don’t qualify if income is above certain thresholds. Those businesses are referred to as Specified Service Trade or Businesses – SSTBs (i.e. legal, accounting, medical and other certain professionals) which will be discussed more later. However, as mentioned in the introduction, Surgery Centers, even though at first glance they appear to be disqualified medical professions, if operated under certain guidelines, do qualify for the full deduction. This too will be discussed in greater detail a bit later. The important thing to keep in mind is that for sole proprietors, partnerships, S corporations, real estate rental owners and others this 20% deduction can have a huge tax reduction impact on your personal 1040 tax return.
The qualification process is simple if taxable income is less than $326,600 married filing jointly ($163,300 if filing single) for 2020. There is no limitation to the 20 percent business income deduction regardless of type of business including SSTBs.
Example 1 Jill & John filing jointly for 2020: Jill works as an administrative assistant and earns $50,000 per year in W-2 wages. John is a partner in a law firm and receives his partner share of income in the amount of $300,000. Their gross income of $350,000 is reduced by their standard deduction of $24,800 which leaves a tentative taxable income amount of $325,200 before the QBI deduction. Since that is under the simplified qualification threshold of $326,600, they will get a QBI deduction of $60,000 (20% of John’s business income). That reduces their taxable income down to $265,200. At their tax rate of 24% the QBI deduction saves them $14,400 in taxes! Even though John is an attorney (SSTB) he is allowed to receive the QBI deduction because they are within the simplified calculation income threshold.
Example 2 Jill & John filing jointly for 2020: Jill works as an administrative assistant and earns $90,000 per year in W-2 wages. John is a partner in a law firm and receives his partner share of income in the amount of $400,000. Their gross income of $490,000 is reduced by their standard deduction of $24,800 which leaves a tentative taxable income amount of $465,200. Since that is over the simplified qualification threshold of $326,600, they do not qualify for a QBI deduction because John is in the excluded class of professions that are not allowed to take the deduction when over that threshold.
For businesses that are not excluded as SSTBs there are ways to qualify for the QBI deduction even if the taxable income amounts are above the simplified qualification income levels. Those calculations are complicated and neither space nor practical application warrants going into those details here. Suffice it to say this circumstance is where careful tax planning before the end of the tax year can significantly increase the QBI deduction obtained.
Surgery Centers, which appear to be medical service entities at first glance, can actually be operated in such a manner as to not be medical service businesses at all. Critical issues such as the proper surgery center billing codes and how to pay staff and contract labor make all the difference in the determination. If you own a surgery center and you’re not getting the 20% QBI deduction with your current accountant, please call us for a consultation. We have saved our client’s literally hundreds of thousands of dollars and we can explain exactly why and how this is done.