Qualified Income Business Deduction (QBID) is going away!
Written by: Stephen Zogal, EA
Published: 6/19/24
I'll be the first to say it! I hate taxes.. but what we all hate more than this is paying more in, you guessed it. MORE TAXES!
Coming up in 2025 and on the Title 26 (IRC - Internal Revenue Code) to change is the Qualified Income Business Deduction. Unless congress has a change of heart and finally start working for the taxpayers, this deduction will be going away.
This deduction amounts to potentially a 20% deduction of the taxable income minus capital gains under IRC § 199A. For many small business owners, this has been a critical component of their tax planning strategy, significantly reducing their overall tax burden and allowing them to reinvest more into their businesses.
What is the Qualified Business Income Deduction (QBID)?
The QBID, introduced as part of the Tax Cuts and Jobs Act (TCJA) in 2017, was designed to provide tax relief to owners of pass-through entities such as S-corporations, partnerships, sole proprietorships, and certain trusts and estates. It allows eligible taxpayers to deduct up to 20% of their qualified business income (QBI) from their taxable income, effectively lowering their marginal tax rate.
Why is QBID Important?
The deduction has been especially beneficial for small and mid-sized business owners, providing them with additional cash flow to:
Invest in growth opportunities.
Hire new employees.
Improve business infrastructure.
Weather economic uncertainties.
The Impending Change
Unless Congress acts to extend or make the QBID permanent, it is set to expire at the end of 2025. The elimination of this deduction could result in significantly higher tax liabilities for many business owners, reducing their ability to invest in their businesses and potentially stifling economic growth.
Potential Impact
The expiration of the QBID could lead to:
Increased tax bills for small business owners.
Reduced capital for business expansion.
A potential slowdown in hiring.
Increased operational costs as businesses adjust to the higher tax environment.
What Can Business Owners Do?
Plan Ahead: Start preparing for the potential tax increase now. Consult with tax professionals to understand the full impact on your business and explore other tax planning strategies.
Advocate: Engage with industry groups and professional associations to advocate for the extension or permanency of the QBID. Voice your concerns to your representatives in Congress.
Optimize Operations: Look for ways to improve operational efficiency and reduce costs to offset the potential increase in tax liability.
Diversify Income: Consider diversifying your income streams to mitigate the impact of the loss of the QBID on your overall financial health.
The potential expiration of the Qualified Business Income Deduction is a significant issue for many business owners. The QBID has been a vital tool for fostering growth and stability in the small business sector. While the future remains uncertain, proactive planning and advocacy can help mitigate the impact. It is crucial for business owners to stay informed and prepared for the changes ahead, ensuring they continue to thrive in an evolving tax landscape.
By staying informed and taking action now, business owners can better navigate the complexities of the tax code and continue to drive their businesses forward, even in the face of changing tax laws.
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