While the deductions for qualified business income (QBI deductions) are still in play, they’re set to expire in 2025. For those who are eligible, our team has compiled four tips that will help you leverage these advantageous tax breaks to maximize your situation.
Read our prequel article for more basic overview of all things QBI.
Check out our top tips below and don’t hesitate to reach out if you need assistance from a CSH tax expert.
1. Aggregate businesses. Electing to aggregate several businesses can allow an individual with taxable income high enough to be affected by the limitations (based on W-2 wages and the UBIA of qualified property) to claim a bigger QBI deduction than if the businesses are treated separately.
For instance, say you’re a high-income individual who owns an interest in one business with significant QBI but little or no W-2 wages and an interest in a second business with minimal QBI but significant W-2 wages. Aggregating the two businesses can result in a healthy QBI deduction, while keeping them separate could result in a lower deduction, or maybe no deduction. However, you must pass certain tests set forth in IRS regulations to be allowed to aggregate businesses.
Important to note: You can’t aggregate a specified service trade or business (SSTB) with any other business, including another SSTB.
2. Claim (or forgo) first-year depreciation deductions. For tax years beginning in 2024, you can potentially claim first-year Section 179 deductions of up to $1.22 million for eligible asset additions (subject to various limitations). For eligible assets placed in service in 2024, 60% first-year bonus depreciation is available.
For 2023, the maximum Sec. 179 deduction was $1.16 million. For 2023, the bonus depreciation percentage was 80%.
First-year depreciation deductions reduce QBI — but they also reduce taxable income, which could reduce the impact of the unfavorable QBI limitations. All things being equal, lower taxable income is generally desirable. So, you may have to tread a fine line with depreciation write-offs to get the best overall federal income tax result.
Important to note: Under the Tax Cuts and Jobs Act, the QBI deduction is scheduled to expire after 2025. In contrast, when you forgo first-year depreciation deductions, you can still depreciate the assets over a number of years under the regular depreciation rules. If tax rates go up after 2025, depreciation deductions claimed in future years could turn out to be worth more than sizable first-year depreciation deductions claimed in earlier years.
3. Make (or forgo) large deductible retirement plan contributions. Deductible self-employed retirement plan contributions allocable to a business that generates QBI will reduce your allowable QBI deduction. But they also reduce your taxable income, which could reduce the impact of unfavorable QBI limitations. Again, all things being equal, lower taxable income is generally desirable. So, you may have to schedule retirement plan contributions carefully to get the best overall federal income tax result.
4. Use married-filing-separately status. Say one member of a married couple operates a small business that generates QBI. It pays no W-2 wages and has only a tiny amount of UBIA of qualified property. If the couple files jointly, their combined taxable income may be high enough to greatly limit, or even wipe out, any QBI deduction, thanks to the income-based limitations. But if the spouses file separate returns, the spouse who operates the small business could potentially qualify for a substantial QBI deduction, because the QBI deduction limit wouldn’t come into play or be only partially phased in on that spouse’s personal return.
Important to note: Filing separate returns to maximize the QBI deduction can have negative side effects elsewhere on your personal returns, such as reduced or disallowed tax credits. Your tax advisor can run the numbers to see if filing separately makes sense.
Connect with CSH
Need help determining if you are eligible or assistance with filing your claim? Reach out to the tax experts at CSH. We would love to help you leverage this opportunity before it is set to expire. Also, stay tuned for potential updates from Congress. Our team stays abreast of the latest tax developments and will be sure to share updates as they happen.
