Many businesses have had a turbulent year, and the current economic situation foresees even more uncertainty. However, regardless of your company’s performance thus far, there is still time to take actions that can lower your federal tax obligation for 2022. Continue reading on how to maximize your QBI deduction, something you may want to consider. Keep an eye out for more!

Maximize your QBI deduction

Pass-through entities (sole proprietors, partnerships, limited liability companies, and S corporations) can deduct up to 20% of their QBI, subject to certain limitations based on W-2 wages paid, the unadjusted basis of qualified property, and taxable income. Unfortunately, the deduction, created by the Tax Cuts and Jobs Act (TCJA), is set to expire after 2025, absent congressional action. So, make the most of it while you can.

You could increase your deduction by purchasing capital assets or raising wages. For example, you could convert independent contractors to employees or increase the salary of existing employees. Of course, these moves usually have other consequences, such as higher payroll taxes, that you should weigh before proceeding. As discussed above, you can avoid the income limit by timing your income and deductions.

Suppose the W-2 wage limitation doesn’t limit the QBI deduction. In that case, S corporation owners can increase their QBI deductions by reducing the business’s wages. (This won’t work for sole proprietorships or partnerships, which don’t pay their owners’ salaries.) Conversely, suppose the wage limitation does limit the deduction. In that case, S corporation owners might be able to take a more significant deduction by boosting their wages.

Turn to us for planning advice

The solution described here and in our upcoming blog posts entails compromises that require careful consideration, analysis, and evaluation. To reduce the tax burden on your business, contact our RRBB accountants and advisors to assist you in making the best decisions.