October 30, 2020
I have received many questions about this topic so I’ll explain how it works the tax cuts that you can get from QBI. If you are a sole proprietorship or if you’re a business partnership on your taxes, you file a 1065 partnership. Or if you file an 1120 S for an S Corp, you will have a tax deduction.
That is because of the QBI or qualified business income tax calculation. It has actually helped a lot of people.
To further tell you about it without getting into the nitty-gritty of how this actually works, essentially if I’m on an S Corp after you’ve got revenue that comes in, you’ve got the cost of goods sold, overhead operating expenses, and so forth, you get your payroll.
And when you get down to the bottom line, you’ve got what the company ended up netting, which is your net income. Well, when you look at your net income, the QBI or qualified business income, will have a calculation that says that you’ll get to go ahead and calculate roughly about 20 percent of whatever that was.
You could go ahead and take as a tax deduction what is calculated within that is going to offset what your taxable income is.
As a result, a lot of people are really excited about it. It really is benefiting a lot of people under the current tax law and their current administration that we’ve gotten in place. And we’ve got about another year and a half to two years to continue to benefit from this. It is really awesome.
However, here’s the caveat I want you to be aware of. We were looking at this with one of our other clients, and we were figuring out kind of where they were actually going to be showing up here. What would be their tax liability towards the end of the year?
As we were getting it, kind of figuring it out, it ended up being at roughly about $70,000. They were super pumped that 70 grand is going to reduce their amount of taxable income in a big way.
Here’s the part that was really surprising, we found out that it was over a certain income threshold. The QBI moves to an alternate qualified business calculation.
Because of it, they will not be getting what they thought they were going to be getting, a whopping $70,000 as a qualified business deduction.
The sad part is, it is not even close. It comes out closer to about $13,000. They’re really going to be receiving only less than 15 grand.
Now, what they’re finding is that, roughly between state and federal taxes, they’re looking at well over a six-figure tax bill this year. That’s right. Over a hundred thousand dollars. Could you imagine writing a check for over a hundred thousand dollars between state and federal taxes? And while you were thinking that you’re going to get this sizable deduction yet, not a single chance.
So they were super surprised at what ended up coming out. I, again, just want to encourage you to know your numbers. As I’ve already said, you gotta know what your percentage of labor is. You gotta know what your net profit is. You gotta know what your tax liability is and make sure that you’re preparing and handling your cash management accordingly throughout the month and throughout the quarter and so forth.
And knowing where you’re going to hit by the end of this year, and you’re not caught surprised.
Lastly, if you need help with your numbers and you’re behind. Or maybe you still haven’t filed 2019 yet. Just know the extension expired on September 15th. It’s getting really pricey as we go month by month.
But if you need help getting that taken care of, or if you need a second opinion of taking a look at where you’re sitting with QuickBooks, I just want to encourage you to send me a message here.
In addition, if you have any other questions about accounting and the likes, I am happy to help. You may send an email to support@simplebackoffice and we can set up a time that is convenient for you.
Chief Experience Officer
“Know Your Numbers, Know Your Business”