Many individuals who own sole proprietorships, partnerships, limited liability companies, S corporations, and certain trusts and estates may be eligible for the qualified business income (QBI) deduction. Is your childcare business one of them? In the following guide, learn what the qualified business income deduction is, whether your childcare company qualifies, and how you can claim your deduction. Read on to find out more.
What Is the Qualified Business Income Deduction?
The qualified business income deduction is a tax deduction provided to owners of pass-through entities, which include S corporations, limited liability companies, partnerships, and sole proprietorships. With any of these tax structures, the individual reports business earnings on his or her personal income taxes; thus, the qualified business income deduction is a tax break on personal returns.
If your childcare business falls into one of the aforementioned tax structures, you may be able to claim the qualified business income deduction regardless of whether you itemize your personal deductions or take the standard deduction on your personal income taxes. The qualified business income deduction does not minimize your business income. If you are self-employed, it also does not impact your self-employment taxes.
The qualified business income deduction allows eligible individuals to deduct up to twenty percent of their qualified business income (QBI), as well as twenty percent of qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income. The QBI is comprised of the net total of qualified items of income, gain, deduction, and loss from a qualified trade or business. The QBI generally includes the deductible portion of self-employment tax, self-employed health insurance, and deductions for contributions to qualified retirement savings plans.
There are quite a few limitations which may impact your eligibility for the qualified business income deduction, and we will take a look at those next.
Who Is Not Eligible for the Qualified Business Income Deduction?
Before we outline who exactly is eligible to receive the QBI deduction, it is helpful to point out who is not eligible:
- Individuals who earn income through a C corporation or who provide services as an employee of a company
- Individuals whose 2021 taxable income is more than $429,800 for married individuals filing jointly or $214,900 for all others
- Individuals who own a business that falls under the following categories of specified service trade or business (SSTB):
- Actuarial Science
- Performing Arts
- Financial Services
- Brokerage Services
- Investment Management
- Dealing in Securities
For individuals whose taxable income exceeds the limits set forth for their filing status, tax professionals use a special formula to determine the amount of qualified business income deduction applicable: either 1) 20% of qualified business income or 2) 50% of W-2 wages or 25% of W-2 wages plus 2.5% of the unadjusted basis of all qualified property, whichever benefits the taxpayer more.
In addition, the IRS sets limits on what may and may not be considered as qualified business income. The following does not meet the requirement for qualified business income:
- Items that are not properly includable in taxable income
- Investment items, including capital gains, losses, and dividends
- Interest income not applicable to a trade or business
- Wage income
- Income from business generated outside the United States
- Commodity transactions or foreign currency gains or losses
- Income, loss, or deductions from notional principal contracts
- Annuities, unless received in connection with the trade or business
- Amounts received as reasonable compensation from an S corporation
- Amounts received as guaranteed payments from a partnership
- Payments received by a partner for services other than in a capacity as a partner
- Qualified REIT dividends
- PTP income
Now that we have explored who is not eligible for the QBI deduction and what items do not meet the requirement for qualified business income, let’s take a look at who is eligible to receive the QBI deduction.
Who Is Eligible for the Qualified Business Income Deduction?
The following individuals are eligible to receive the QBI deduction:
- Individuals who earn income through pass-through entities, including sole proprietorships, partnerships, limited liability companies, S corporations, and certain trusts and estates
- Individuals whose taxable income falls within the limits set by the IRS for the given tax year
The above stipulations are the only requirements individual business owners need to meet in order to be able to claim the qualified income tax deduction. Although there are quite a few limitations set forth by the IRS, if you find your childcare business within the restriction guidelines, you will certainly want to claim your tax deduction.
For more information about the qualified business income deduction, read these guidelines from the IRS.
How to Claim the Qualified Business Income Deduction?
Determining whether your daycare business is eligible for the qualified business income deduction and how much of a deduction you can take according to your tax filing status can be complex. We recommend working with your professional tax expert to make sure you benefit from the QBI deduction and all other available tax incentives for your childcare business.
We hope this guide to the qualified business income deduction is helpful as you seek to take advantage of federal tax incentives for your daycare company. If you find yourself overwhelmed by your childcare business taxes, enlist the help of the experts at Honest Buck Accounting. Our team of professional accountants can help you figure out whether you qualify for the QBI deduction so you can begin saving money and growing your business. Schedule a call with us today.