How to Maximize the QBI Deduction Amid the Pandemic
Kirsch CPA Group
Feb 24, 2022

Since the qualified business income (QBI) deduction first become available in 2018, things have changed dramatically, mainly due to the various effects of the COVID-19 pandemic. Possible tax rate increases and inflation have also entered into the mix. How do these developments affect planning to maximize QBI deductions for your business?
The Basics
The QBI deduction was one of the cornerstones of the Tax Cuts and Jobs Act. For 2018 through 2025, the deduction is available to eligible individuals, trusts and estates, but it’s not available to C corporations or their shareholders.
The QBI deduction can be up to 20% of:
- QBI earned from a sole proprietorship or single-member limited liability company (LLC) that’s treated as a sole proprietorship for federal income tax purposes, plus
- QBI from a pass-through business entity, meaning a partnership, LLC classified as a partnership for federal income tax purposes or an S corporation.
Pass-through business entities report their tax items to their owners who then take them into account on their owner-level returns. The QBI deduction, when allowed, is then written off at the owner level.
Important: This article focuses on individual taxpayers who can claim QBI deductions, with the understanding that essentially the same considerations apply to trusts and estates.
Close-Up on QBI
QBI means qualified income and gains from an eligible business reduced by related deductions and losses. QBI from a business is reduced by allocable deductions for:
- Contributions to a self-employed retirement plan,
- Part of your self-employment tax bill, and
- Self-employed health insurance premiums.
The following items do not count as QBI:
- Income from the business of being an employee,
- Guaranteed payments received by a partner or an LLC member treated as a partner for tax purposes for services rendered to the business,
- Salary collected by an S corporation shareholder-employee, and
- Salary collected by a C corporation shareholder-employee.
On your personal return, the QBI deduction doesn’t reduce your adjusted gross income (AGI). In effect, it’s treated the same as an allowable itemized deduction.
Unfortunately, the QBI deduction doesn’t reduce your net earnings from self-employment for purposes of the self-employment tax nor does it reduce your net investment income for purposes of the 3.8% net investment income tax (NIIT) on higher-income taxpayers.
Limitations
At higher income levels, unfavorable QBI deduction limitations may come into play. These income limits are indexed annually for inflation. Here are the income-based phase-in thresholds for 2020 through 2022:
Phase-In Ranges for 2020 through 2022
Filing Status | 2020 | 2021 | 2022 |
Married Filing Jointly | $326,600 – $426,600 | $329,800 – $429,800 | $340,100 – $440,100 |
All Others | $163,300 – $213,300 | $164,900 – $214,900 | $170,050 – $220,050 |
These limitations are phased in over a taxable income range of $50,000, or $100,000 for married couples who file joint returns.
If you exceed the applicable fully phased-in threshold, your QBI deduction is limited to the greater of:
- Your share of 50% of W-2 wages paid to employees during the tax year and properly allocable to QBI, or
- The sum of your share of 25% of such W-2 wages plus your share of 2.5% of the unadjusted basis immediately upon acquisition (UBIA) of qualified property.
The limitation based on the UBIA of qualified property is for the benefit of capital-intensive businesses, such as manufacturing or hotel operations. Qualified property means depreciable tangible property (including real estate) that meets the three criteria:
- It’s owned by a qualified business as of its tax year end,
- It’s used by that business at any point during the tax year for the production of QBI, and
- It hadn’t reached the end of its depreciable life as of the tax year end.
The UBIA of qualified property generally equals its original cost when it was first put to use in your business.
Finally, your QBI deduction can’t exceed 20% of your taxable income calculated before any QBI deduction and before any net capital gain (net long-term capital gains in excess of net short-term capital losses plus qualified dividends).
Unfavorable Rules for SSTBs
If your operation is a specified service trade or business (SSTB), QBI deductions begin to be phased out when your taxable income (calculated before any QBI deduction) exceeds the applicable threshold. See “What’s a SSTB?” above.
The following phase-out ranges apply to SSTBs for 2020 through 2022:
Phase-Out Ranges for 2020 through 2022
Filing Status | 2020 | 2021 | 2022 |
Married Filing Jointly | $326,600 – $426,600 | $329,800 – $429,800 | $340,100 – $440,100 |
All Others | $163,300 – $213,300 | $164,900 – $214,900 | $170,050 – $220,050 |
If your taxable income exceeds the top of the applicable phase-out range, you’re not allowed to claim any QBI deduction based on income from any SSTB.
Effects of Income Reductions
Many businesses had lower income in 2020 and 2021 — and they may also have lower income this year. However, the impact on your allowable QBI deduction could go either way. Other things being equal, lower income translates into lower QBI deductions. But lower income can also mitigate the impact of the unfavorable QBI deduction limitations. This can be confusing, but your tax advisor can clarify your situation.
QBI Deduction Planning Moves
Remember that, as the law reads now, the QBI deduction is scheduled to disappear after 2025. So, it’s essentially a use-it-or-lose-it deal. Congress could extend this deduction, but you probably shouldn’t bet on that happening. Here are three possible strategies for you to consider to help maximize QBI deductions through 2025.
1. Aggregate businesses. Aggregating 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 were separate.
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 none at all. However, tests set forth in IRS regulations must be passed for you to be allowed to aggregate businesses.
Important: You can’t aggregate a SSTB with any other business, including another SSTB.
2. Claim (or forego) first-year depreciation deductions. Under current tax law, you can claim 100% first-year depreciation deductions and/or big first-year Section 179 depreciation deductions for most business assets that are placed in service through the end of 2022.
First-year depreciation deductions reduce your 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: The QBI deduction may be a use-it-or-lose it deal. In contrast, when you forego 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, 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 forego) 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 tread a fine line with retirement plan contributions to get the best overall federal income tax result.
Impact on Prior Returns
If you’ve not yet filed your 2021 Form 1040 that includes income and deductions from a sole proprietorship or pass-through entity business that could generate a QBI deduction, consider the ideas above before filing.
Similarly, you may be able to file amended 2020 returns that take some of these ideas into account. Consult Kirsch CPA Group.
It’s Complicated
The QBI deduction rules are lengthy and complex. Kirsch CPA Group can sort through the details and determine how to get the optimal federal income tax results for your situation.
What’s a SSTB?
In general, a specified service trade or business (SSTB) means any trade or business involving the performance of services in one or more of the following fields:
- Health, law, accounting, and actuarial science (architecture and engineering firms aren’t considered SSTBs),
- Consulting,
- Financial, brokerage, investing and investment management services,
- Trading,
- Dealing in securities, partnership interests or commodities,
- Athletics and performing arts, and
- Any trade or business where the principal asset is the reputation or skill of one or more of its employees or owners.
Before the IRS issued regulations, there was concern that the last item on this list could snare unsuspecting businesses, including local restaurants with well-known chefs. Thankfully, the regulations limit the last definition to trades or businesses that receives fees, compensation, or other income for:
- An individual endorsing products or services,
- The use of an individual’s image, likeness, name, signature, voice, trademark or any other symbol associated with that person’s identity, and
- An individual’s appearance at an event or on radio, television or other media platform.
We can help you tackle business challenges like these – schedule an appointment today.
© Copyright 2022. All rights reserved.

About The Author
Kirsch CPA Group is a full service CPA and business advisory firm helping businesses and organizations with accounting,…
Tags
Sign Up for Email Updates
Related Articles





















Tax Treatment of Debt Forgiveness: Watch Out for Tax Bills Delivered COD
- 01-18-23
- Kirsch CPA Group












Manufacturers: Be Aware of These 3 Business Tax Provisions Currently in Limbo
- 01-18-23
- Kirsch CPA Group



The Tax Deductible Mileage Rate for Business Driving Increases for 2023
- 01-04-23
- Kirsch CPA Group









Succession Planning Considerations for Construction Business Owners
- 12-14-22
- Kirsch CPA Group






Prevent Fraud at Your Construction Company With a Holistic Approach
- 11-30-22
- Kirsch CPA Group









Manufacturers Must Act Now to Maximize Depreciation-Related Tax Breaks for 2022
- 11-09-22
- Kirsch CPA Group



It’s Time for Businesses to Rethink Their Working Capital Practices
- 11-09-22
- Kirsch CPA Group









Social Security Wage Base and Earnings Test Amounts Increase in 2023
- 10-27-22
- Kirsch CPA Group



New Law Enhances Payroll Tax Break for Small Manufacturers’ Research Expenses
- 10-13-22
- Kirsch CPA Group







































How Buy-Sell Agreements Factor into Business Owners’ Estate Plans
- 09-14-22
- Kirsch CPA Group









SALT Cap Workaround Law Could Save Ohio Business Owners Over $100 Million
- 08-31-22
- Kirsch CPA Group
























How Manufacturing Companies Can Benefit from the Section 179 Expensing Deduction
- 08-04-22
- Kirsch CPA Group



























Could the Work Opportunity Tax Credit Help Your Construction Company?
- 06-23-22
- Kirsch CPA Group






Good News: IRS Boosts Standard Mileage Rates for Second Half of 2022
- 06-23-22
- Kirsch CPA Group
























Education Benefits Can Help You Recruit and Retain Smart Employees
- 05-26-22
- Kirsch CPA Group









Ensure Your Construction Accounting System Has the Right Features
- 05-12-22
- Kirsch CPA Group





















John Kirsch Named to Greater Butler and Warren Counties Business Hall of Fame
- 03-25-22
- Diane Glover






Manufacturers Need to Act Soon to Take Advantage of 100% First-year Bonus Depreciation
- 03-17-22
- Kirsch CPA Group
























Commission Fraud: Salespeople Getting Paid More Than They’ve Earned
- 02-04-22
- Kirsch CPA Group
















































Consider a New Approach to Meeting Your Business Real Estate Need
- 09-17-21
- Kirsch CPA Group
























Beware: Teleworking Arrangements May Cause State Tax Withholding Issues
- 08-18-21
- Kirsch CPA Group
























5 Common Construction Accounting Risks — and How to Address Them
- 07-07-21
- Kirsch CPA Group















Supreme Court Finds No Standing to Challenge a Provision of the ACA
- 06-24-21
- Kirsch CPA Group






Labor Shortage: Unlock Solutions by Evaluating Your Employment Value Proposition
- 06-09-21
- Kirsch CPA Group









Material Participation Standard is the Key to Unlocking LLC Tax Losses
- 05-27-21
- Kirsch CPA Group









Know Your Legal Obligations Under the Americans with Disabilities Act
- 05-13-21
- Kirsch CPA Group



























PPP Loan Not Forgiven? There’s a Safe Harbor for Deducting Expenses
- 12-03-20
- Kirsch CPA Group












What You Need to Know About the Deferral of Payroll Tax Obligations
- 09-15-20
- Kirsch CPA Group


















PPP Loan Forgiveness – Significant Borrower Friendly Changes on the Horizon
- 06-04-20
- John Kirsch





















Tax Filing Deadline Remains April 15 – Payment Due Extended to July 15
- 03-19-20
- John Kirsch








































































Prepare to Receive a Social Security Administration No-Match Letter
- 10-15-19
- Kirsch CPA Group





















IRS Announces Changes for Personal Use of Employer-Provided Vehicles
- 06-10-19
- Diane Glover






























Watch Out for these Tax Issues When Planning for Your Business in 2018
- 06-26-18
- Diane Glover









What Image Does Your Organization Present to Large Contributors?
- 03-15-18
- Kirsch CPA Group



8 strategies to help you adapt to economic down turn without layoffs
- 02-24-18
- Diane Glover













































Remember To Take Required Minimum Distributions at Age 70 1/2 Or Face Penalties
- 02-17-17
- Sue Schloemer







































Time is Money: Don’t Spend Valuable Time Inputting Data into QuickBooks
- 06-18-22
- Diane Glover




