The Tax Cuts and Jobs Act of 2017 included a crucial element known as the Qualified Business Income (QBI) deduction, which is set to expire post-2025 unless extended by Congress. This deduction is worth trillions of dollars and provides critical tax relief to entrepreneurs and investors.
Through the QBI deduction, businesses or investors in areas designated as Qualified Opportunity Zones can deduct up to 20% of their qualified business income. The deduction lends a significant hand in scaling operations and promoting business growth.
As many small businesses are pass-through entities, their profits are reported on personal tax returns. The QBI deduction reduces the tax burden by lowering taxable income derived from these businesses.
However, it’s crucial to note that not all businesses qualify for this deduction. It’s primarily designated for businesses generating income through a specific trade or service. Qualified businesses need to understand the QBI deduction’s monetary impacts, as it can shape fiscal strategies and contribute to long-term success.
With the looming expiration of the Tax Cuts and Jobs Act, businesses must anticipate potential changes and plan strategically.
Understanding QBI deduction’s impending expiration
Engaging the services of a trusted tax consultant or financial advisor can be an effective approach to navigating these financial waters.
The QBI deduction has contributed significantly to financial opportunities for eligible small businesses. Knowledge about this deduction is paramount for entrepreneurs and investors as it offers a 20% cut in eligible income and stimulates economic growth through retention and reinvestment of earnings.
Importantly, the QBI deduction is not automatic and requires specific opt-ins in tax returns. Furthermore, the QBI deduction has income-dependent phase-out rules, adding an extra layer of complexity. Trusted tax professional or certified public accountant (CPA) assistance can prove instrumental in interpreting these complexities and securing maximum tax savings.
The QBI deduction aimed to equalize tax rates of pass-through entities with those of corporations, reducing the tax burden on small businesses. Recognizing that corporations should not receive preferential treatment over pass-through entities was a marked shift in tax policy.
Despite increasing concerns over the continuity of the QBI deduction post-2025, Howard Gleckman, a senior fellow at the Urban-Brookings Tax Policy Center, argues that it is vital for private businesses. He adds that removing this deduction would intensify economic inequalities.
Dan Ryan, a tax partner, expresses concern for potential disruptions for business owners if the tax break were to cease suddenly. He advocates for government transparency about any significant change and for businesses to seek professional advice for strategic future planning.
