If you have a pass-through business, you may be able to deduct up to 20% of your Qualified Business Income (QBI) on your federal income tax return. Sole Proprietorships, LLCs, S-Corps, and partnerships are all considered pass-through entities.
For the purposes of the pass-through deduction, qualified income is defined as your business income minus:
- Capital gains or losses
- Dividends or interest
- Annuity payments
- Foreign currency gains or losses
- Reasonable compensation for owner/employees of S-Corps
- Guaranteed payments to partnerships and LLCs
Restrictions to the deduction
The income threshold for 2023 for claiming the full 20% is $182,100 for single filers or $364,200 for joint filers. If your business earns more than the threshold, the deduction becomes 20% of your business income or 50% of total wages paid to employees – whichever is less.
If you are in a service business, the deduction begins to phase out when your income reaches $182,100 for singles and $364,200 for married filing jointly. The 20% deduction is reduced to $0 when you earn $232,100 for individuals and $464,200 if married filing jointly. These service businesses include:
- Healthcare providers (doctors, dentists)
- Lawyers
- Accounting
- Actuaries, and Financial service providers
- Performing artists
- Consultants
- Athletes
- Businesses that depend on the specific skills of the owner/employee to exist
- Brokerage services
- Athletics