Tax Deductions for Creators - Qualified Business Income

Taxes can eat up a good chunk of a creator’s paycheck. But the good news is, creators can actually take advantage of a number of small business tax deductions to save big.

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One of them is called the Qualified Business Income deduction, aka QBI. Here’s our breakdown of it and how creators can benefit.

The Qualified Business Income deduction was enacted back in 2017 as part of the Tax Cuts and Jobs Act. That cut corporate tax rates from 35% to 21%, and QBI was introduced as a way for non-corporate taxpayers (aka pass-through businesses like partnerships, sole proprietorships, LLCs, and S-corps) to also receive a tax break. That means most creators can benefit from this deduction.

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Under QBI, eligible businesses can deduct up to 20% of their qualified taxable income (with some exceptions), regardless of whether you normally take the standard or itemized deduction. To qualify for the full deduction, your total taxable income can’t exceed $191,950 ($383,900 for those filing jointly). 

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If you’re a “specified service trade or business,” (which refers to lawyers, accountants, and other trade professionals, including actors), you might only qualify for a partial QBI deduction, or not qualify at all. 

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If you’re an SSTB, generally you qualify for the full QBI deduction if you fall under that income threshold. But if your taxable income falls between $191,951 and $241,950 for single filers, and $383,900 and $483,900 for joint filers, then you only qualify for a partial deduction. 

QBI gets a little more confusing when creators exceed the taxable income limits. 

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The IRS has something called the “phase-in range,” which is basically a secondary limit that’s $50,000 above the regular income limit. So, in this instance, the phase-in range would be $241,950 for single filers.

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If you’re over that upper limit and the phase-in range (which is $50,000 above the upper limit for single filers and $100,000 for joint), then you don’t qualify at all.

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One thing creators should note is that QBI only lowers your income tax, not your self-employment tax (yes, those are two different things).

While the IRS doesn’t specify what income counts as qualified business income, they did share what does not:

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• Capital gains and losses
• Stock dividends
• Interest income (like ones earned from bank accounts)
• Income earned outside of the U.S.
• W2 income (like if you get paid a salary)

Creators should contact a tax professional to figure out their QBI deduction and eligibility. Keeper Tax offers a handy guide to help creators determine their deductions, but here is a general overview.

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For all qualified creators with taxable income under $191,950 ($383,900 for joint filers): 

Simple: Just multiply your qualified income by 20%.

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So if you made $100,000 in qualified income, then with a 20% deduction, your total taxable income goes down to $80,000.

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For SSTB creators with taxable income above $191,950 but below the phase-in threshold: 

This gets a little trickier. But basically, only a portion of your SSTB income wouldn’t qualify for QBI.

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Tax advisors Bowles Rice says to divide the total amount above the income limit by the total phase-in.

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So, if you’re $10,000 above that first threshold, you divide that by $50,000 to get 20% – which means, you only need to exclude 20% of your SSTB income from QBI.

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For creators with taxable income above the phase-in threshold:

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You might not be able to take a full 20% QBI deduction, but you can still get something.

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In this case, your deduction cannot exceed the greater of these:

• 50% of W2 wages that you paid
• 25% of W2 wages + 2.5% of qualified depreciable property (like buildings and equipment)

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So let’s say a creator paid $100,000 in W2 wages and have a $500,000 business office.

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In the first calculation, you would multiply $100,000 x 0.50 to get a $50,000 deduction. 

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In the second, you would multiply $100,000 x 0.25, then add $500,000 x 0.025, to get $37,500 ($25,000 + $12,500).

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In this scenario, you would take the deduction from the first calculation.