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QBI Deduction and Tax Savings

QBI Deduction and Tax Savings

The Tax Cuts and Jobs Act Created a New Type of Deduction—the Qualified Business Income (QBI) Deduction

This deduction is designed to lower the effective tax rate for owners of pass-through entities … sole proprietors (including independent contractors), limited liability company members, partners, and S corporation shareholders.

The 2018 income tax return was the first time that this deduction could be claimed. This personal deduction doesn’t require any cash outlay or special action; it belongs automatically to eligible business owners. Again, it is merely a mechanism to reduce the effective tax rate on their business income. While some business owners are still on extension (and have until October 15, 2019, to file their 2018 return), preliminary statistics are in from the IRS to show how many owners claimed the 20% QBI deduction for 2018 and what this amounted to in total QBI deductions.

QBI Deduction and Tax Savings

Number of taxpayers claiming the QBI deduction

In total, more than 14 million owners of pass-through entities claimed the QBI deduction. This number likely will increase when those on extension submit their returns.

Owners in all income ranges benefited from the QBI deduction, but the biggest group by far of owners claiming the deduction were in the upper range (the following income groups represent combinations of smaller breakdowns by the IRS):

  • Less than $20k: 957,000
  • $20k to $50k: 3,377,000
  • $50k to $75k: 2,233,000
  • $75k to $100k: 1,855,000
  • $100k to $250k: 4,473,000
  • $250k to $1 million: 1,395,000
  • $1 million +: 126,000

The number of owners claiming the QBI deduction is far lower than the total number of owners of pass-through entities. There are about 30 million Schedule C filers alone. The discrepancy could be explained in a number of ways, in addition to filers on extension who have yet to be counted.

  • Some owners may not have taken advantage of the deduction even though eligible to do so. While this would not account for too many such owners (after all, software and return preparers would be sure to pick up on the deduction), the complexity and confusion in the deduction may have diminished some claimed.
  • Owners of specified services trades or businesses that were too successful and had taxable income over a set amount for their filing status could not take any QBI deduction.

Amount of QBI deduction claimed

According to preliminary statistics, the total dollar amount of the QBI deduction claimed topped $74 billion.

The following shows the total dollar amount of the deductions (in millions) for different income ranges (the actual statistics break down the numbers even finer than displayed here):

  • Less than $20k: $486
  • $20k to $50k: $4,827
  • $50k to $75k: $5,181
  • $75k to $100k: $5,303
  • $100k to $250k: $22,561
  • $250k to $1 million: $21,525
  • $1 million +: $14,294

Final thought

The QBI deduction was supposed to be a way for owners of pass-through entities to enjoy a tax rate on business income somewhat similar to the flat 21% tax rate on C corporations. Did it work? Perhaps it’s just too early to say.