Helping creators understand QBI and calculating how big a deduction they might qualify for.

QBI (Qualified Business Income) Deduction for Creators

The Qualified Business Income (QBI) deduction was enacted by the Tax Cuts and Jobs Act of 2017 and allows eligible taxpayers to deduct up to 20% of their qualified business income. The deduction is available to many small business owners and self-employed individuals, including content creators. 

Understanding and utilizing the QBI deduction can significantly reduce your tax bill, but it's not always straightforward. Whether you can take advantage of it, and to what extent, depends on various factors including your filing status, your income level, the nature of your business, and your W-2 wages or business assets. 

What Is Qualified Business Income?

Qualified Business Income refers to the net income from a qualified trade or business. This is essentially your business income minus your business expenses. For a content creator, this might include income from advertising revenue, brand deals, merchandise sales, or any other business activities. 

Importantly, QBI doesn't include income earned as an employee. So if you have a day job and create content on the side, only the income from your content creation business would count as QBI. 

Who Can Claim the QBI Deduction?

The QBI deduction is available to self-employed individuals, freelancers, sole proprietors, and partners in partnerships or S-corporations who have qualified business income. It's not available to C-corporations or those who earn income as employees. 

As a creator, you’re likely self-employed or operating as a sole proprietor, LLC, partnership, or S-corp, which would make you eligible for this deduction, assuming your income is below certain threshold limits. 

How Is the QBI Deduction Calculated?

The amount of the QBI deduction can be complex to calculate because it depends on several factors:

The basic rule is that the QBI deduction is the lesser of:

• 20% of the taxpayer's QBI from a qualified trade or business, OR
• 20% of the taxpayer's taxable income (not including net capital gains and qualified dividends)

However, if your taxable income exceeds certain thresholds (in 2023, these are $182,050 for single filers and $364,200 for married filing jointly), additional rules come into play. 

These rules may limit your deduction based on the W-2 wages paid by your business and the unadjusted basis immediately after acquisition (UBIA) of qualified property held by the business. 

If your income is within these thresholds, you generally can deduct 20% of your qualified business income. If your income exceeds these thresholds, the calculation becomes more complex. 

Estimating Your QBI Deduction

Let’s say you’re a self-employed content creator who earned $100,000 in business income and had $20,000 in business expenses, leaving you with a QBI of $80,000. Let’s also assume your taxable income is $70,000 after all other deductions.

The basic QBI deduction would be the lesser of 20% of $80,000 ($16,000) or 20% of $70,000 ($14,000). So your estimated QBI deduction would be $14,000, which would reduce your taxable income from $70,000 to $56,000. 

This doesn’t translate directly into a $14,000 tax savings. Instead, the tax savings would be your marginal tax rate applied to $14,000. If you’re in the 22% tax bracket, for instance, a $14,000 deduction would save you around $3,080 in federal taxes. 

Specific Considerations for Creators

There are a few additional things creators need to be aware of regarding the QBI deduction:

Specified Service Trades or Businesses (SSTBs): The IRS has designated certain businesses as “specified service trades or businesses” (SSTBs). For these businesses, the QBI deduction is phased out if income exceeds certain thresholds. The list of SSTBs includes fields like health, law, financial services, and other businesses where the reputation or skill of one or more of its owners or employees is a principal asset of the business.

Although most types of content creation wouldn’t typically be classified as an SSTB, some creators who provide services like consulting, performing arts, or certain financial services may fall into this category. If you’re unsure whether your content creation activities constitute an SSTB, it’s best to consult with a tax professional. 

Summary

The QBI deduction can be a valuable tool for content creators to reduce their tax burden. However, it can also be quite complex to calculate. It’s always advisable to consult with a tax professional to ensure you’re properly calculating and claiming this deduction. Remember, the goal is to legally minimize your tax burden while complying with all tax laws and regulations.