How Does The 20% QBID Work? QBID Calculator - What Qualifies - [QUALIFIED BUSINESS INCOME DEDUCTION]

hello welcome back in this video i'm answering the question about what is this 20 of income deduction you may have heard of it it's called the cubid deduction stands for qualified business income deduction otherwise known as the 20 deduction in this video i'll be breaking down how that deduction works who qualifies for cubid if the qubit is calculated on gross income or net income if self-employment schedule c income qualifies exactly what type of net income qualifies for this deduction if sole proprietors get it as well as exactly how the calculation works for this 20 deduction so basically we're gonna have a little crash course and i have a cubid calculator to show you at the end so that you can calculate how much your deduction is let's jump in if you're new here my name is amanda and you're watching the business finance coach where i simplify all the technicalities of business to help you succeed because i truly believe that the world needs your business and you shouldn't be held back by all of these aspects of our civilized society you should be able to understand these things and i try to make them as clear as possible here on my channel let's jump in to covering what the cubid deduction is and how you can take this 20 deduction for your business so how does this 20 pass through business deduction work so it starts with 20 of pass-through income from a trade or a business and it's true that we never have had a deduction like this this is a deduction amount based on a percent of income so what does it mean by pass through income from a trade or business if we take a look at my cheat sheet here we can see it starts with tax types of businesses so this isn't the legal side that's why we don't see llc this is the tax side of things so the first one is self-employed meaning there is no separate business and we can see under how it's taxed that's a pass-through or flow through entity same thing with the partnership and same thing with the s corp and what that means is that with all these tax entities the business doesn't actually pay any taxes the activity flows through to the owners in the first case with self-employed that's a business that's not separate from an owner and a rental activity would qualify as well on schedule e the self-employed is a business activity reported on schedule c both of those scenarios are where the activity is reported with the owner's personal tax form and they both qualify because their trade or business in the partnership and s corp the business files a separate business tax return for the business activity but the activity flows through to the owners on scheduled k-1s there might be one schedule k-1 and an s-corp for all of the activity going to one owner or there's multiple owners and each owner just gets a share of the business net income based on how much they own or special allocations so when people are wondering is the 20 on the gross income from the business or net income the answer is it's on net income so every business has accounting reports that summarize the business activity so this would be the information from the income statement where we have income or sales or total revenue minus expenses and that gives us net business income and so it's that net business income amount that we are going to times by 20 and that equals the amount of the deduction so if you're the only owner of your business or rental property it's that entire amount times 20 if you're in a multi-owner business it's your share of that net income times 20 and this deduction is taken on the personal tax form form 1040 our individual form you can see here on page one line 13 qualified business income deduction and you can see it says attach form 8995 or form 8995-a and that's the form that we calculate the qualified business income deduction on so now we need to talk about the limitations the first main limitation that applies to everyone is that that 20 of your flow through business income that amount is limited by 20 of taxable income so if we come back to our form 1040 here we can see taxable income at line 15 right below so this is kind of a circular calculation but we're looking at taxable income times 20 and we're gonna take the lesser of those the next limitation is based on if your total taxable income goes above a threshold amount and if it does go above that threshold amount then we need to look at what type of business do you have is it considered a specified service trade or business which is otherwise abbreviated throughout everything about this deduction as sstbs and this is a category of businesses that was defined just for the 20 deduction so that's why you've never heard of this because it's a category that's been made up and it seems quite random and arbitrary and very nuanced as we look at who is in this category and who isn't but basically let's take a look at this threshold so if you're single or any other filing status as of the last day of the year and your taxable income is above 163 300 up to 213 300 then the deduction is going to phase out over that range if you are considered an sstb business type for married taxpayers filing jointly their threshold amount is 326 thousand six hundred dollars exactly double what the single threshold was and they have exactly double the phase out so it's a hundred thousand dollars over which the deduction will phase out if your business is an sstb so how do you know if your business is an sstb let's take a look at this detailed breakdown courtesy of intuit and kind of taking these pieces from irs interpretations of the laws that have come out there's been quite a bit of back and forth about this over the past few years since the 2017 tax cuts and jobs act and now they've narrowed it down to this and the general definition of an sstv started out with a trader business involving the performance of services in the fields of health law accounting actuarial science performing arts consulting athletics financial services investing in investment management trading dealing in certain assets or any trade or business with a principal asset the thing that's making the business money is the reputation or skill of one or more of its employees or owners i mean what business doesn't that apply to but they didn't use that to bar all of us from basically being an sstb and instead they've now provided a lot more details that break out who is and who isn't so these are the terms here on the left that i just covered in their initial statement and then we've broken it out into included fields and excluded fields so for health people who are sstbs are physicians pharmacists nurses dentists veterinarians physical therapists psychologists and then people who are excluded are services that are not directly related to medical service fields so operation of health clubs or spas payment processing for the medical industry research testing manufacturing and sale of pharmaceuticals and medical devices are excluded it's interesting how those far more profitable industries are excluded while the people who are working are included remember being included in the sstb means that the threshold and limitation applies to us in law there's lawyers paralegals legal arbitrators mediators they are included in sstbs and it's only other services that are related to law that are excluded for accounting accountants enrolled agent tax return preparers financial auditors and all similar professions are excluded same in actuarial performing arts actors directors singers musicians entertainers they are all excluded but services that do not require unique skills to the creation of performing arts such as maintenance and operation of equipment or facilities for use in the performing arts or in the provision of services by persons who broadcast video or audio of performing arts to the public so you can kind of see this now consulting is a huge area right persons providing clients with professional advice and counsel to assist in achieving goals and solving problems and persons providing advice and counsel regarding advocacy with the intention of influencing decisions made by government or governmental agency and lobbyists attempting to influence legislators and other government officials on behalf of a client and other similar professionals so this is lobbyists consultants of any type right providing people with professional advice so what's not an sstv in the consulting area performance of services other than advice of counsel such as sales or the provision of training of educational courses it also excludes consulting services embedded in or auxiliary to the activities of a trade or business that isn't sstb so that would mean if you provide a little bit of consulting with a product so i'm thinking of these spa pools where a company is selling these big spa pools they're really expensive you know no sound and deprivation tanks and so they may provide a bit of consulting included in the 30 000 cost of the pools but they're not charging you for that separately and so that wouldn't disqualify you it also sounds like i might not be thrown out for my educational courses even though they are in the area of accounting which is specifically excluded at least some of them moving on we have athletics and it's basically the same pattern that we've seen you know financial services is a bit more broad of an area and so they've gone into a bit more detail here but it continues on and you know if people have questions do let me know in the comments below we could go deeper on this and most people i've been talking to it's been pretty straightforward whether you are an sstb or not based on this added detail that we have now so once you are not an sstv and you're above the phase out there are a few two other limitations that are gonna come into play the first is that cubid cannot exceed the greater of two things one fifty percent of the business wages so that's w-2 wages paid to employees or the owner's share of that coming through on the schedule k-1 the businesses have to report this information for its owners or 25 of wages plus 2.5 of the real property that the business owns now this has a special name called unadjusted basis immediately after acquisition which of course is abbreviated ubia and so that's 25 of wages plus 2.5 of the essentially real estate that the business owns and it's basically the investment that the business made in that property and assets because we're using unadjusted basis immediately after acquisition that's generally going to be what we paid for it and all the costs that went in to that asset being ready for our intended use so that would be the most value that our assets are ever at in the time we own them typically so you take the greater of these two and compare it to that 20 of the pass through net income and the lesser is going to apply this is a limit so again and this limitation applies to businesses that are not sstbs and are above the phase-out so we've covered how the cubid deduction is calculated on what amount qualifies the net income that flows through from a trade or business from a pass through or just on the owner's return that 20 is limited to 20 of taxable income and then it depends if your taxable income is above that threshold amount and if your type of business is considered a sstb if it is then your deduction ends after that phase-out amount if it's not then we have this second limitation that's based on the greater of 50 of your w2 wages or 25 of your w2 wages plus 2.5 of the unadjusted basis in your real estate so we take the greater of those and that's the limit so we'll take whichever is less between our 20 of the pass-through income and that greater of those tests now i of course have a spreadsheet template that allows you to calculate this so here we are in my cubid calculator and this actually came from my business types comparison spreadsheet template because in order to compare what your taxes are going to be like under the different business types the cuba deduction plays a huge role right this 20 pass-through deduction you can see it's not allowed under the corporate structure and so we actually needed an entire worksheet to account for the other stuff that the owners have going on in their return now we are going to focus on the simple calculator here so the first thing we need to do is put in all of your taxable income w-2 wages interest income net real estate income net business income so we include the amounts that are going to qualify for the qubit here but also everything that you would have on your tax return as well as your spouse's activity the one thing we don't include are capital gains capital gains are when we sell things that we own for investment purposes such as stocks or real estate so you can see i've added a business here our net income from our self-employed business is going to be 50 000 and we have w2 wages of 50 000 so we got a job and a business now when we come down here are you is sstb we just covered this we got to say yes or no so we'll say yes here we select our filing status single married filing joint head of household and that will change the standard deduction here that brings us down to taxable income and of course this taxable income number is what we're comparing to the threshold amount so when we're married you'll probably remember this number three two six six hundred and if we are single it's the half of that and so we're summarizing down here with these two questions for the calculator to work and it's telling us we're below the phase out and are we qualified for the deduction yes from the information under taxable income we need to put what applies for qualified business income so in this case it's just the business at fifty thousand if you have real estate investment trust and publicly traded partnerships these are primarily real estate investment vehicles then you would get scheduled k-1s and need to account for the that income and loss here as well these amounts can increase the 20 deduction so here's the qubit calc for people below the phase out we're either going to take 20 percent of our qbi income 50 000 times 20 is 10 000 or 20 of taxable income which is this 87 800 which is 17 560. so the lesser of these is the 10 000 and boom we get to take it okay so now let's try an example where we're above the threshold so if we come back here and we add in a hundred and fifty thousand in our business so we'll make some more money and you can see now our taxable income is between the phase out so now it says we're in the phase out we need to update our qualified business income to our full amount so now our 20 of qbi is 20 000 and our 20 of taxable income is 37 000 so we're still going to qualify to take our 20 we're not going to be limited by taxable income if we're a specified service trade business then we probably don't have wages to the owner we probably don't have any value in the property so these tests aren't going to apply but because we are in the phase out we are still going to qualify to take a deduction it's just instead of it being 20 000 it's phased out over that fifty thousand dollars and therefore we're only going to get ten thousand two hundred now let's look at above the phase out if we go above the phase out and so let's say we've got three hundred thousand from our business now we're above the phase out and we have no cubid because we are an sstv if we go ahead and change that so that we're not an sstb then we qualify we just have an additional limit and so let's say instead of this being a business that this is real estate income now we need to update our qbi and now our preliminary cubid based on our total qbi's 20 of 300 060 000 and our taxable income limitation is still above that right because we have that extra w-2 wage so now let's say in our real estate business we have no w-2 wages we don't hire anyone but we do have a property that earns us 300 000 a year 300 000 a year is roughly 25 000 a month which would lead me to believe that that would probably be something that would apply to a three or four million dollar property so let's go ahead and put three or four million here and that could be spread out you know like we could say that these are buildings one through nine so it's nine buildings you know 300 million is the total value 300 000 is the total income the tests are based on the greater of these two tests so we only have to have one test populating so in this case it's 75 000. our 60 000 deduction 20 of our income is still going to apply no problem 20 of 300 is our 60 and so we're not limited by the test of 75 000 and so we get to take the full amount so as you can see this is really a real estate deduction but thankfully at least people under the threshold basically get to just take the 20 of the net pass-through income okay that's all for the 20 cubid deduction i hope this helps you understand the deduction i teach people how to use free tax usa and there's a bunch of videos in the description below including if you have a business or rental property and they take care of the cubid deduction for you you just need to know the amount that goes into that it's your net business income and confirm that amount keep in mind it's your net business income after your deduction for self-employment taxes as well as any other deductions for agi which like i said before health insurance under the business and retirement plans that are through the business if you enjoyed this video give it a like to let youtube know otherwise i'd love to hear your questions comments below the video if you're new here consider subscribing or check out all the other information i have in the description below this video and other videos and i'll see you next time bye

Channel: Business Finance Coach

Views: 19,345

Keywords: How is Qbid calculated?, How do I calculate qualified business deductions?, how does qbid deduction work, how does qbid phase out work, Who qualifies for the QBI deduction?, what is qualified business income or loss, Can Qbid be claimed for SSTBs?, form 8995 instructions, form 8995 example, how to calculate qbi, What qualifies as Section 199a?, How is Section 199a deduction calculated?, What is Section 199a on k1?, qualified business income deduction explained

Id: WKCCrkEbHu4

Length: 21min 18sec (1278 seconds)

Published: Sun Nov 22 2020