20% Business QBI Deduction Tax Rules Explained!  – Very Detailed

20% Business QBI Deduction Tax Rules Explained! – Very Detailed

ladies and gentlemen how y’all doin Mike
the CPA here in today’s video we’re gonna be covering the most complex new
tax deductions for business owners and that is the qbi deduction or the
qualified business income deduction also known as the 199 a deduction now
learning all this stuff throughout the course of this year in 2018 was
borderline torture but now I get the privilege of being able to torture all
of you out there in the land the internet with all this new juicy tax
knowledge this is gonna be a two part series guys
so in this first part we’re gonna cover this in great detail all the theory the
rules what this deductions all about and then in another separate video I’m gonna
have an Excel document with five full-on step by step calculation examples that
literally took me hours to put together that I’m gonna be showing to you guys in
the next videos of this series I’m gonna have a link to that video down in the
comment section down below and also in the description section of this video so
make sure to be looking for it and without further ado there’s a lot to
cover here so let’s go ahead and dive right into it do you remember when you
were back in math class and you had to learn an entire new section or entire
new chapter on math that was completely different than the previous chapter do
you remember how hard that was well that is kind of like what this deduction is
it’s a whole brand new frontier attacks and it’s really different than any other
area of tax so you really have to think of it in that way it’s a whole new set
of rules and a whole new way to think about things so you really need to take
the time to wrap your head around it to understand it so let’s go ahead and get
started and I’ll keep this video as short and concise as I possibly can so this do $1.99 a deduction is stimming
of course from the tax cuts and Jobs Act right the tax cuts in Jobs Act was
signed into law on December 22nd and along with this came the provisions
section 199 a these new tax savings are huge imagine you’re a business owner and
imagine your taxable business income is $100,000 now we know that the maxi
duction you can get is 20% now pretend that came to you and I said hey mr. and
mrs. business owner of your $100,000 guess what because of these new tax
rules $20,000 of that is no longer subject to federal income taxes that is
how powerful these deductions are now let’s discuss the more formal definition
of this so for the years beginning on January first of 2018 all the way
through December 31st of 2025 this deduction is going to be in play and
basically what it means is a taxpayer other than a corporation got that so if
it does not account for corporations is entitled to a deduction equal to 20% of
the taxpayers qualified business income so qualified business income is defined
as the net amount of qualified items of income gain deduction and loss with
respect to a qualified trade or business that is effectively connected with the
conduct of a business within the United States one of the things that is going to
affect the seduction is capital gains whether there’s long term or short term
but you guys will see that later on within this video in terms of qualified
business income an area of caution is rental real estate income they the IRS
has not ruled one way or the other or have provided guidance to let us know if
they’re gonna count that as qualified business income which is really
unfortunate since we’re getting close to the end of 2018 at the time I’m filming
this video historically courts have ruled in different tax cases in the past
that even the ownership of a single rental property could constitute or
qualify as a trade or business you know it’s up to you as a taxpayer to take the
position you want to take on this I’m expecting we’re gonna see more guidance
but just keep that in mind whether you want to put that account that rental
income as qualified business income or not on your 2018 tax return let’s talk about now what is not
qualified business income what is not qualified business income and that is
dividend income any interest income net gain from foreign currency transactions
income from national principle contracts amounts received from an annuity or
really important items that point out here on this list of all of them is
compensation or wages so your wages whether they’re from your job or whether
you pay yourself wages from your own business they’re not going to be
factored into your qbi income they will if you own your own business and pay
yourself wages they will help factor into your qbi deduction but it’s the
wages you pay yourself are not gonna factor into your overall qbi income but
a lot of people are asking if it’s gonna add to your income for qbi purposes and
it’s not also on this lesson so you guys can see is guaranteed payments
guaranteed payments are not included in qbi income calculation the reason this
is important is because obviously people want to have as high of a qualified
business income as possible for this deduction because the higher amount
their business income is the higher the potential deduction they could possibly
get but so that’s why it’s important to know what items do not factor in to
qualified business income as they’re listed here let’s continue this one kind of came as a shocker to me
but the question was do I need to be active in order to qualify for this qpi
deduction and the answer is no at least that’s how I understand it unless things
change but so to the best of my knowledge the answer is no you not have
to be active in the trader business in order to qualify or receive the
deduction the one in a proposed riggs indicate that the tax payers level of
involvement in the business does not matter if they meet the requirement of
IRC section one and na they may be entitled to the deduction whether they
are passive or active within the business so that’s pretty cool now let’s
discuss some of the limitations of this deduction the one minute a deduction is
limited to 20% of the lesser of qualified business income or taxable
income after reductions for any net capital gains short term or long term
but before the 199 a deduction is taken into consideration so I know I know it’s
confusing but just take take your time to study that and wrap your head around
it we’re gonna look at one quick example here right now so you guys can
understand what we’re talking about it turns out taxable income this piece
right here remember your taxable income is
generally your adjusted gross income minus your standard deduction or
itemized deduction if you itemize so your AGI minus standard deduction or
your itemized deduction equals your taxable income okay let’s look at a
calculation example and let’s see if we can make more sense of all this stuff
because it’s very confusing when you read it out loud you have to I had to
read this several times to follow it okay we have our calculator on screen
now now let’s look at an example and put these rules in the place so we have a
taxpayer married filing joint with a $100,000 of qualified business income
from their business so that’s $100,000 right that’s $100,000 of income right
there so we’re gonna add 100,000 then this same person they also have $100,000
in long-term capital gains so we’re gonna add another $100,000 here so now
their total income before deductions is 200,000 right so now they’re they have
$30,000 of tax deductions let’s just pretend these are their itemized
deductions so now from this 200,000 we subtract 30,000
from that so this means their net taxable income in this example would be
one hundred and seventy thousand dollars but now we have to apply these set of
rules or this logic in order to calculate our deduction okay so it’s 20
percent of the lesser of either qualified business income or taxable
income after reduction for any net capital gains we when we first come down
here we see that their qualified business income is $100,000 correct so
we know what that is but now we have to look at it from the other angle so we
know our net taxable income is one hundred and seventy thousand dollars
because we just added all this stuff up and then took out the itemized
deductions so but now we have to back out long term capital gain remember it’s
taxable income after reduction for any net capital gains so we take one hundred
and seventy thousand as we have here and we subtract out the long-term capital
gains of 100,000 so now this is our net taxable income after capital gains have
been taken to account so now which number is smaller the hundred thousand
of qbi or this seventy thousand well if you have passed math class which I hope
you did you know that seventy thousand dollars is the right number
so the 70 thousand dollars is smaller so that is the number that we have to use
in order to find out what our qualified business income deduction is so we’re
gonna take seventy thousand dollars and we’re gonna multiply that by twenty
percent because that’s the max deduction we can receive so our qpi deduction in
this example the result is fourteen thousand dollars so this taxpayer can
reduce their their taxable income by fourteen thousand dollars and we’re
you’re gonna see that show up and because I’ve looked at the 2018 draft
forms it’s gonna be on line nine if I remember correctly and I’ll put it up
here on screen and it’s going to reduce your taxable income even further I know
I went over that example pretty fast but like I said you’re gonna have this
handout you can download for free and you can re-watch this video anytime so
take time to study it just that’s the best
you’re gonna learn this stuff is to actually sit through it and work through
problems for yourself if you really are hoping to understand it because I don’t
think there’s another way it’s like it’s like math class you really do have to
work problems out to understand how this all works so what businesses and taxpayers qualify
for the $1.99 a deduction so we know that if you’re a partnership you’re
eligible if you’re an S corporation you’re eligible now remember I said
corporations are not able to take this deduction but I met C corporations if
you’re an S corporation which means you’re a pass-through entity then you
you are still allowed to take the deduction if you’re a sole proprietor so
like if you’re let’s say you have a lawn mowing business and you just work for
yourself well then you would your business would
also fall under this category so you you would be eligible to take it and or if
you’re an AG cooperative you can take it other eligible taxpayers include
individuals trust and the states on that note now let’s talk about the
people who don’t get to take it remember C corporations do not qualify if you are
an employee I have to make this very clear because a lot of people asked
about this you do not get the deduction to qualify for this deduction you have
to have ownership interest within a business so what is a qualified trade or business
that is the question you should be asking yourself so every business is a
qualified trade or business as defined under section 199 a with the exceptions
being the trade or business of performing services as an employee
sorry employees you get screwed and any a specified service trade or business
sorry service businesses they don’t like you either before we get into all of
that let’s talk about some income limitations if your filing status is
single you get the full twenty percent deduction if your taxable income is less
than one hundred and fifty to seven thousand five hundred if you’re married
filing joint you get the full twenty percent deduction as long as your
taxable income is less than three hundred and fifteen thousand and once
you go above these amounts then the deduction starts to phase out for you
so no deduction once your income exceeds if your single two hundred and seven
thousand five hundred so which is a fifty thousand dollar spread right here
that’s what this is is a fifty thousand dollar spread and now if you’re married
you have more room here it’s actually a hundred thousand dollar spread so you’re
as long as you’re within this range you can still take the deduction I want to
make a very clear here that once you’re if you’re in a specified service
business which we’re about to cover here in just a second then once your income
is above this then you can no longer take any deduction for one ninety nine
eight so once you’re over these amounts you’re out of luck if you’re in a
certain specified service trader business but if you’re if you’re like a
manufacturing company or another kind of business that is not a specified service
trader business you have some more leeway you have some more options even
if your income is above these amounts which is pretty cool so then there’s
another test it’s called the income limitation phase in and so that they
look at the limit is the greater of 50 percent of your w-2 wages or 25 percent
of your w-2 wages plus two and a half percent of your on adjusted basis this I’m going to tell you is not going
to make a lot of sense right now until we actually look at a full-on examples
of this in the next part of this series in Excel that we’re gonna do in the next
video I’m gonna let you guys read this part for yourself on screen I don’t want
to read every single line Adam – you guys – for sake of time but I’m
basically here I’m explaining how there are exceptions for deductions if you’re
in a specified service trade or business so go ahead and just take your time and
read this for yourself it’ll make a lot of sense now let’s get into the
important part of what if the heck is a specified service business and the
acronym for these things guys there’s two acronyms out there and the acronyms
are SS b or SS t b and i know what you’re thinking
I know what you’re thinking when I said that is you’re thinking of STD and it
sounds just like it well specified service businesses are SSB or SS TB or
bad so if you if you have if you work within one of these types of businesses
they don’t it this deduction is not your friend it’s not as friendly to you so
just like STD is bad if your business is an SS B it’s bad because there’s
limitations to the deduction you can take and that’s kind of how I remember
some of this stuff I know it’s crazy but it helps it this stuff is these new
rules or bunkers now let’s look at some examples of these
SS B’s the specified service trade or business if your business is in the
field of law and you are engaged in the performance of legal services by
attorneys paralegals and other similar professionals who serve in a legal
service capacity yeren SSB if you’re an accountant
hey that includes me contents auditors enrolled agents and other similar
professions are considered service types of businesses doctors pharmacists nurses
those are considered services performing arts actors singers directors for all of
you out there who are aspiring to be famous youtubers and make a living off
of youtube our extra money from YouTube unfortunately YouTube based on my
interpretation and this definition would fall off I would fall under this
specified service trader business category so your deduction might be
limited so I’m gonna stop reading this list you guys can read it in your own
time read through it there’s a lot of different professions that would fall
under this category as specified service trader business so now that we’ve looked
at some examples of that there’s one more thing now that will make a lot more
sense let’s go back up to this income limitation thing which we were talking
about up here so whether or not you’re in a specified service trader business
or a different kind of business altogether the good part is as as long
as your income is below these amounts which this is gonna be true for most
people so most people are gonna be able to get the full 20 percent deduction so
if you’re single and your incomes under this and as long as your if you’re
married filing joint as long as your income is under this amount you’re gonna
be able to get the full $1.99 a deduction whether you’re in a service
business or not so that’s the good news once your income goes above these
amounts if you’re in one of those specified service trader businesses
which we discussed down here that’s where your deduction completely stops
you get no chance to do the abduction after that but if you’re in a business
that is not one of these things right here
if you’re like a manufacturing company then there’s some other tests you can
run under these income love other limit income limitation rules that might allow
you to actually get a deduction so I hope that makes sense I know it’s
confusing but it’s gonna make a lot more sense in the next part of this series
we’re going over the theory here ladies and gentlemen so that when we do do the
calculations the numbers will make more sense because if you don’t know all of
this stuff all of these rules the calculations will make absolutely no
sense so that’s why we’re covering this first in the handout take the time or
pause the video here to read more about specified service trade or businesses
I’m not going to read all this to you for sake of time alright I think I’m
gonna go ahead and stop the video right here I know I went over a lot of
information very quickly remember to download this handout for free it’ll
make a lot more sense I think you’re gonna get a lot from just rereading the
handout watch this video again and go through this calculation example up here
that we covered just to whet your appetite and then next week in next
week’s video I’m gonna publish five full on calculation examples so it’s very
important you study up on this think of this as a class your homework ladies and
gentlemen so read up on this download the spreadsheet and study this and then
I’ll see you again in next week’s video if you liked the video drop a like make
sure to share this information with a friend especially a friend who’s
thinking about starting to their own business or a friend already has their
own business I’m sure they would find this information helpful because this is
a new frontier attacks and CPAs and professionals are trying to learn this
as well as business owners and if you’re new to money in life TV welcome on this
channel our goal is to help you become fiscally fit and we do that by teaching
finances investing taxes and more on a regular basis so be sure to subscribe so
you do not miss any of our future uploads if there was ever a year to find
an accountant if you’re a business owner this would probably be the year to do it
if you’re if you have a complex tax situation is to find out I see if seek
out a CPA in your area who knows this stuff very well alright ladies and
gentlemen I really look forward to reading your comments I hope you have a
great week and I will see you in the next part of this series and then I
think it’s gonna start to make way more sense but until then
do your homework don’t let me down and I’ll see you in the next one
love you all peace you

54 thoughts on “20% Business QBI Deduction Tax Rules Explained! – Very Detailed

  1. Free download dropbox link to the word document shown in video can be found here: https://www.dropbox.com/s/k55x8s0lxfexyql/199A%20Handout.docx?dl=0

  2. Time Stamps:

    •(What is 199A?) What is the qualified Business Income Deduction: 2:10

    •What counts as qualified Business Income : 3:10

    • Is rental income qualified business income? 3:41

    • What is NOT qualified business income? 4:20

    • Do you have to be active in the business to receive the qualified business income deduction? 5:48

    • 199A Qualified business income deduction limitations 6:28

    • 199A deduction calculation example: 7:25

    • What type of businesses qualify for the 20% 199A deduction? : 10:32

    • What is a qualified trade or business? : 11:35

    • Income limitation phase in explained : 13:08

    • What is a specified service trade or business?: 14:35

  3. Hows it going everyone. I'm publishing this video on Dec 23rd of 2018 so Happy Holidays/Merry Christmas to all of you. Thank you so much for your support and for continuing to CRUSH that like button. I will release the 2nd and final part to this series on Sunday 12/30/18 (Just before tax season) Once I have that next video ready I will post a link to it here in the comments and in the description section of this video. Between this video and part 2 coming out next week these are by FAR the most technically complex tax videos I have ever produced on this channel. I hope you get a lot of these videos. I've went to numerous professional level courses on this stuff throughout 2018. This is the most complex new area of tax law in years. I just hope I was successful at taking these complex rules and explaining it in a way that the average person can understand. Lots more tax and investing videos to come in 2019. Have a great week everyone. Live life uncaged!!

  4. Thanks Mike for sharing your knowledge and delivering it in digestible pieces that we can follow. You obviously invest a lot of time and effort in creating your videos. Please keep them coming.

  5. Merry Christmas! A whole lot of awesome info again Mike. Thank you. You knocked the wind out of me at 16:09 though LOL. Us YouTubers can't take the deduction for adsense earnings. I'm just hoping TurboTax calculates this one corretly for me.

  6. Hello your videos have been so helpful to me as I just started doing taxes this year it gives more confidence in this following tax season. I wanted to ask you which software is good for tax preparation?

  7. Part 2 of 2 is here! 5 Examples (step by step) of how to calculate the QBI deduction: https://youtu.be/8nrxVVaw3NE

    The downloadable excel document can be found here: https://www.dropbox.com/s/36phs8rgsidw075/199A%20calculation%20examples%20%28protected%29.xlsx?dl=0

  8. How is Taxable Income calculated? In the new Form 1040, Taxable Income is adding AGI + Section 199A deduction. It is circular logic.

  9. Huge props and thanks to you for putting all this info into video form! I got about halfway through before I had to take a breather, but planning on coming back in. Thanks again, man. You're amazing!

  10. can you give some examples of service businesses? Thats like most businesses lol what about like hair dressers, tax preparers, life coaches..none of that qualifies right?

  11. A small word of advice for those business owners out there. DO NOT, under any circumstances, try to calculate the QBI yourself. I am a tax practitioner of many years, and I have gone through several seminars on this new law and my head is still spinning. Many of the final regs have not even been written by the IRS, and the government shutdown has exacerbated that situation. Use an experienced tax prep firm, EA Practice or CPA firm to do your taxes this year. Those with no business are not affected by QBI and the tax law is much easier for these individuals.

  12. What are your thoughts on the effects of QBI when it comes to EmployEE contributions vs EmployER contributions (e.g. in a Solo 401k)? Here is a quote from the IRS 199A regulations, ""the deduction for contributions to qualified retirement plans under section 404 are considered attributable to a trade or business to the extent that the individual’s gross income from the trade or business is taken into account in calculating the allowable deduction, on a proportionate basis to the gross income received from the trade or business." The words "attributable" and "proportionate" make me think that this language is referring to EmployER contributions and not EmployEE elective contributions. So in a real world example, if I have a solo 401k and want to contribute $10,000 into it for tax year 2018, the EmployEE contribution may not have an effect on my QBI, therefore giving me a full $10,000 worth of deduction, whereas a $10,000 EmployER contribution looks like it would lower QBI and would only be worth a $8.000 deduction (80%). I would appreciate your opinion on this. Thanks!

  13. I am a retired EA and I would like to thank you for this video. A very clear and concise explanation of a typically unclear IRS ruling. Thanks.

  14. I'm trying to my taxes and one of my side jobs was food delivery for both Grubhub and UberEats. Do these businesses qualify for QBI?

  15. Thank you. Getting as much info as I can. Then repeat repeat repeat. Takes a while for it to soak in. And most our clients have no idea about it.

  16. How can a member of a 1120S increase their business income for the QBI deduction since W2 earnings are not included?  Will distributions help with the QBI?

  17. Do authors who get royalties from sales on Amazon qualify? I get a 1099 misc. from Amazon and they classify it as "royalties." The income is between 40 and 50 thousand.

  18. Awesome video and topic, and I haven't started watching. The IRS was no help, instructions sucked and no one knows. Post #2; watched it you did great! I'm still foggy though watching it the second time. I'm confused as a sole proprietor;
     I don't pay myself on a W2 however, I do take all money that is left over after expenses and taxes so does that count as my pay?
     I have a carpet cleaning (service) business, work alone and have no capitol gains, does the profit I keep/use for myself qualify?
    My income on the cleaning buis is <50k. I decided not to include my rental properties. If any what would be the % of the AGI is take off?
      This is likely a common scenario, any help would be greatly appreciated.

  19. Hey Mike, new subscriber here. Due to a slight lack of the IRS being absolutely clear about all professions that may be an SSB it seems like there might be some contention between the IRS and and taxpayers.

    Especially with when they mention the word “trade” on both sides. By definition it’s a skilled job, typically one requiring manual skills and special training. How do you differ a qualified trade business and specified service business when they say an SSB is also any trade or business where the principal asset is the reputation or skill of one or more of its owners or employees?

    My question for you is about my job, I own a Body Piercing and Jewelry store. It’s a manual skill and specialized training but the business is based off my reputation.. 😂

  20. Q5. What is a qualified trade or business?

    A5. A qualified trade or business is any trade or business, with two exceptions:

    Specified service trade or business (SSTB), which includes a trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, investing and investment management, trading, dealing in certain assets or any trade or business where the principal asset is the reputation or skill of one or more of its employees. This exception only applies if a taxpayer’s taxable income exceeds $315,000 for a married couple filing a joint return, or $157,500 for all other taxpayers

    Performing services as an employee

  21. Odd. The H &R tax preparer told me yesterday that because my wife is a self employed dog trainer, she cant take this deductions. He stated that it is because she is in a service profession. Now im confused. Lol

  22. This was crazy but fun! You made it so interesting. Keep up the good work. Im glad I found this video.

  23. Does this apply to me if I own 40% of a construction LLC and I am involved in the business??!!!! I get paid quarterly

  24. I want to withdraw my 401K and use it exclusively for my business start up costs. This will not be a lona but a full on withdrawal that would normally be considered taxable income. As a sole proprietor or LLC could these funds be eligible for the 20% tax deduction?

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