(How to Calculate the 20% 199A QBI Deduction) - Very Detailed (20% Business Tax Deduction Explained)
Welcome back to money in life TV everybody how y'all doing out there this, is the channel where you can come to to learn about finances. Investing, and taxes. We, are about to start part two the final part of helping, you understand. The. $1.99. A qualified. Business income deduction, now, if you haven't seen the first part make sure you go back and watch that video first I'm gonna leave links in the description, section and in, the comment section it's very important you watch that first because, in the first part of this series it's gonna help you understand the rules and the overall ideas, behind, this new 20%, business tax deduction, after, you've watched the first part to this series come, back to this video and we're, gonna look at some calculation, examples, on screen this, excel. Document, that I'm showing you on screen right now has, five full, step-by-step, calculation. Examples, and once, you go through these and once we go through these I think the rules part. Of it is gonna make a lot more sense it's. Hard to understand, the rules by themselves, it's hard to understand the calculations, by themselves, but won't you know both then, this deduction starts, to make sense so that's how, I recommend you learn it so after filming this video and after watching it after taking time, to edit it I realized there was points of clarification I, needed to add now. I just wanna make it very clear that this video is going to help you tremendously understand. The deduction, but it's not gonna take you all the way I have to be brutally honest the real this stuff is so technical ladies, and gentlemen that's the only way you're truly gonna understand it and the best way to learn it is to do. Some self-study, you have to invest some time learning this stuff I can't teach you this in five minutes 10 minutes 15 minutes this, is a subject, that you need to invest, some of your own time and your own self-study, to learn so I want to make that clear I really, think this video is gonna help you a lot with the understanding of it and so it's part one but, I don't want to miss, guide you or mislead you you're still gonna have to invest some of your own time to really understand, this because I'm not here to BS you but, I think you guys will get a lot of this video I've included, several sound bites and clarification, tips throughout this video and some, fun ones as well to keep you guys engaged so I hope you enjoy it let's keep on moving forward so, I'm gonna cover three examples with you on screen this video and two of them you can just look at for yourself do some self-study, and then, we'll go from there so, without further ado let's not waste any time let's, go ahead and dive right into it. Let's. Go ahead and start with example, number one an, example of one we're looking at an ax taxpayer, when, their income is below the. Qbi deduction, phase-out, ranges which we discussed the last video. Okay. Guys chipper has stopped me right here, and he's told, me if you don't take some time to clarify some of this stuff you're gonna confuse, the hell out of people and we don't want to do that so, throughout the video as we look at these examples I'm gonna be talking about this qbi income, phase-out, don't know what does that mean, well, we're gonna be looking at every, example in this video it's gonna be based on a single filing. Status so chipper is gonna be our, example. And he's a single filer and so, that his key bi-phase, out in terms of his taxable income begins. At one, hundred and fifty-seven thousand, five hundred, so. When I say his income, is below the, qbi income, phase-out it means his income, is less, than, one hundred and fifty seven thousand five hundred if I say his qbi income, is in-between, the phase-out, it means, his income is between one, hundred fifty seven thousand, five hundred and two, hundred and seven thousand five hundred if I, say his qpi income, is above, the qvi phase-out, it means, his taxable, income is, above.
Two, Hundred and seven thousand, five hundred so, I that's what I mean when I'm talking about qbi, income. Phase-out, and this, chart shows it right here now like I said all the examples. Are gonna be based on a single filer I did that so for consistency, so you don't get confused between one filing status and the other if you're, married filing joint, there's no difference, in the calculation. The only difference is that you have a higher qbi. Income, phase-out, range so in other words you, can your taxable income can, be higher before, this deduction starts, to phase out for you so if you're married filing joint as you can see on the chart your, taxable income has, to be hit above, three hundred fifteen thousand, before it even begins to phase out whereas. If you're a single filer once, your taxable. Income hits one, hundred fifty seven thousand five hundred your, deduction, starts to become limited, beyond that point let's continue this, taxpayer, has no capital, gains and, as an important you're gonna see why an example number two so, here's the facts of this situation chipper. Operates, as a sole proprietor, he files a Schedule C on, his tax return chipper. Manufactures, bird cages his, bird cages are not considered, a specified, service business, and that's because he's a manufacturer. He doesn't provide services, he makes it sells bird cages now. This is chippers only business and we're gonna discuss multiple business, is by the end of this video but let's just focus, on one business example, of the time so, chipper, is single, he's, not married because he's single and ready to mingle his, net qualified, business income is nets. To be a one hundred and forty, thousand, dollars in this example chippers. Taxable, income before, the qbi deduction. Is taken. Into account is one, hundred and ten thousand, dollars chipper. Has zero. Like I said in net capital gain so no capital gains here, to report and. A reminder the, twenty percent deduction, for. Key bi is limited. To the lesser of the. Net qbi. Or. Taxable. Income reduced. By any capital. Gains but before, the qpi deduction, so here's chippers taxable, income so net, qbi is 140, taxable. Income is 110, so, this is how in this, example it's calculated, so, we because, his taxable income is lower. 110. Is lower than 140, we, start with that and, it's. Very simple we take the hundred, and ten thousand, dollars and we multiply. It by the 20%. So. Chippers qbi, deduction, in this example, this very very simple example is. $22,000. That, he's gonna report on, 1040. Page 2 line 9. Which, is right, here guys and this, is a draft, of the new forms obviously, the new forms aren't fully released yet but, this is where you would expect this deduction to show up so chippers taxable, income would. Be reduced by, $22,000. Based. On this example so. This is one of the easiest examples, and now we're gonna get they're gonna get harder as they go they're gonna get more complicated as you'll see. It was gonna be that easy did you, you. Know, for. A second, there, yeah. I, kind. Of did. Silly. Rabbit. So, just real quick I'm not gonna do the full walkthrough on example, number two example. Number two is just like example, number one the, only difference in this example is that chipper does have some capital gains so chipper. Has that, it's the same business income but. He has taxable. Gains of, $8,000. So what we have to do is we. Have to reduce his, taxable, income by. 10,000, and so. When you reduce when, we do that his net taxable, income that, is used for this qpi calculation. Is. 102, thousand, dollars. So. It's it's just the same rules once again it's, to. Do the calculation, you take the lesser of your. Qualified, business income. 140. Or the lesser of your taxable income after they, have reduced for capital gains which. Is 100 mm, so same process so. Once we reduced his taxable income by, his net capital gains, this. Is the number we use one hundred and two thousand, because it's lower than the 140 I hope you guys are following me I know this is a lot of information really quickly but. I'm gonna try to get through this information as quickly as, possible for you guys remember you're gonna have this whole, document, for free to download and you can study all these for yourself so. It, just changes the formula, a little bit as you can see and his. Deduction, in this example is gonna be come out to be twenty, thousand four hundred bucks. An. Example. 3 we're looking at chipper, chippers. Business is now a specified. Service, trader business if you remember from part one it, matters. Big-time whether or not you're in a specified service trade, or business. Now. Remember an example. One and two chippers. Income, was below the qbi, deduction, phase-out, of one, hundred and fifty seven thousand, five hundred so. It didn't matter if he was in a specified service trader business or not because, his.
Income, Based. On his filing status was below one. Hundred and fifty seven thousand five hundred dollars so. Like i said it doesn't matter what kind of business he's in as long as he's, below that threshold he's. Going to get the full twenty percent deduction are likely to get the full twenty percent deduction but. Now an example three, that we're gonna look at, where. We he, isn't a specified service business chipper, operates, as a sole proprietor, he files a Schedule C on his tax return chipper. Works as a doctor so this is doctor chipper to your service he's doctor dreamy. He. Renders Medical Services and his, business is considered, a specified, service business, now, this is chippers only, business okay this is his only business, that he operates, his. Filing status is still single. But. Notice here his. Net qualified. Business income is. $225,000. And chippers. Taxable, income before, the qbi deduction, now in this example is two hundred thousand, dollars now. Chipper has no capital, gains in this example zero so we don't have to worry about that so. As you guys know the common rule is it's. The lesser of your twenty percent the, the twenty percent deduction is the lesser of your qualified, business income, or your, taxable income reduce for any taxable gains well once again we're, gonna be looking at this two hundred thousand because it's less than. The. Two hundred twenty-five thousand dollars of his net qpi, alright. What, you're gonna notice ladies and gentlemen what I want you to notice as you look at these examples based, on your filing status based. On your overall income and based. On the type of business you're in it's. Going to change how, you do, the calculation. And that's what makes this deduction so complex, there. Are some similarities, but. There's also some differences so, you have to really pay attention to, this and you're going to see that as you study each example, because really the purpose of this video is to, really help you understand, how this all works and that's why I'm putting this together for you guys because there's so many questions out there about this, deduction guys it took me months to learn this stuff. Months. And I'm a and, I do this stuff for a living so imagine how, complicated this can be for somebody who doesn't do accounting our taxes for living it's pretty challenging so.
Let's, Go ahead and go to the the example, now let's, go let's go for it here because chipper. Its income, this see this two hundred thousand it's above, the, one hundred and fifty seven thousand, dollar range as where the phase-in, starts, to to come into play so, chippers income, is. Two, of two hundred thousand, dollars as taxable income is a. Is, how much above the hundred fifty seven thousand five hundred, its. Forty, two thousand, five hundred dollars, above, the. The, phase-out range okay, so his, deduction, begins. To phase out once, he's over one, hundred and fifty seven thousand five hundred and so you're gonna see here and hope you guys can to read that can read this okay says, chippers taxable income is forty two thousand five hundred dollars above the phase-out range so as you guys can see that's the calculation we just did so. So. Chippers deduction, phase-out, percentage, is eighty, five percent. Because. Forty, two so I should I should mention here that the, deduction for. A single, filer for. Somebody who filed single, it maxes. Out at two hundred and seven. Thousand five hundred that's, where this deduction would completely, phase-out if you're, in a specified service, trade, or business which. In this example chipper. Is so. Between two hundred and seven thousand five hundred and one. Hundred fifty seven thousand. Five hundred that's. A fifty thousand dollar range and so once chippers, income, exceeds. This. To 207. Five hundred he, gets no deduction. Whatsoever. And this. Is why it's important to go back and understand all those rules in the other video because if you don't understand it it's not these calculations, like I said it won't make sense as you guys can see here's how the calculation, plays out so, chippers deduction, and rewatch this video as much as you need to guys and study this worksheet chippers, deduction phase-out percentage is eighty five percent because, forty. Two thousand, five hundred divided, by fifty thousand, which is the, spread of the phase-out range for a single filer is eighty. Five percent okay, so we know his phase-out range is eighty five percent so let's let's, see how this is calculated. So it's thus the limited $1.99, a deduction, is calculated, as false. So. We know his qualified, business income is. $225,000. Right because that number 225. Thousand is coming from right here we. Know his phase-out percentage, is eighty five percent because, that number is coming from right here. So. The amount of the phase-out is one, hundred ninety one thousand, two hundred fifty, dollars so what this does is it's going to reduce his qualified, business income and it's going to change how we look at things now so. The qualified business income of two hundred twenty-five thousand, dollars now, we subtract. Out the phase-out. Amount of one hundred ninety one two fifty, so, now it's basically revising. His qpi deduction, hurry his KPI income its revising, his qbi income, at this point so, now he's, got a new qualified, business income of thirty three thousand seven fifty so.
Now His. Qualified. Business income deduction, is calculated, on this, amount, so initially when we looked at this we, saw that his taxable, income was. Lower than his, qbi but once we revised, it because. His income, is above, these, phase-out limitations. His. Qbi, after, it's reduced, for the amount of the phase-out, his. Revised Cuba is now lowered, the thirty three thousand seven fifty is now obviously, lower, than. His taxable, business Inc are his taxable income up here so, that's why we now have to use this. Amount to, calculate, the twenty percent deduction on that so. Now we take twenty percent times a thirty three thousand seven fifty and chippers. One ninety nine a deduction, is now, six thousand, seven hundred fifty dollars I know. That's a lot to follow but. It's gonna serve you well to study these in your own time it's gonna make a lot more sense it's, really hard to get, this across in a video very, clearly without, you guys really knowing the rules and really studying, these calculations, for yourself in each tab I've included some, of the limitations. That we were talking about like the income phase-out limitations, so, you can see I'm not pulling, these numbers out of thin air if they're just coming from the rigs and the rules. Now. Let's move on to example 5 this is the final example I want to share with you in this video and what. We're gonna do in example. 5 is when. A taxpayer. And when their income is over the, qbi deduction. Phase-out, ranges, and when. They're in a non, specified. Service trader business so, they're not in a service business and. They're. Their. Income. Is well over the deduction, phase-out ranges so what does that all mean well, when when their income is over the qpi deduction, phase-out it basically, means if we scroll down here it. Means their income is above these amounts. But. Now normally if like I like, I said recently if they're in an SS b or a specified, service business their, deduction, would be they would have no deduction at all at this point they're out of luck no chance of giving any toward adduction but. Because. They're not in a specified service trader business because, in this example chipper, is once again he's a manufacturer. Chipper. Operates as a sole proprietor and he files a Schedule C on his tax return he. Manufacture, his birdcages once again his, bird cages are not considered, a specified, service trader business and this is shippers only business so let's come back down here because, shippers, not in a specified service business he, gets to apply some other rules that might allow him to take the deduction so, now we're looking at this box right here where it says w-2, and on adjusted basis limitations, phase in so.
Let Me zoom in on this a little bit so you guys can see that so. There's. Two tests here first, if the limit is the greater of 50%, of w-2 wages or. 25%. Of w-2 wages plus. Two and a half percent of an adjusted, basis so take a good look at that guys pause the video and now let's go to the top and work our way down to see how this is all calculated, and this will make a lot more sense once you see it in calculation, form so let's go up to the top and read the facts for this example, okay. Okay, so once. Again shippers filings has a single. Chippers. Net qualified, business income is two. Hundred ninety thousand, dollars and. Chipper. In this example pays wages, of eighty thousand, dollars, chipper. Owns one. Hundred, and ninety thousand. Dollars in assets within his business. Chippers. Tax a link before the qbi deduction, is, 260. Thousand, dollars and, chipper. Has to keep it a little bit more simple to. Keep us a little bit more simple we're. Gonna say that he has no capital gains zero. All. Right let's see how this deduction. Plays, out first we need to do some, calculations. To cut to figure out what the limitations are on on chippers deduction, because, chippers income is so high because, his income is well above the phase-out range so, first we're going to do the 50% of w-2 wages test so. We know chipper, paid eighty thousand, dollars in wages right because that number is coming from right here, so. We do 50%, of w-2 wages so. That's $40,000. Right for teeth out our 80 thousand times 50% is 40,000, now. We're gonna need to look at test 2 test 2. Is 25%. Of w-2 wages which. Is 80,000, times 25 percent plus, 2. And a half percent of an adjusted, basis, in assets, so, in this example remember chipper had a one hundred ninety thousand, dollars in assets. Within, his business okay so. You would take we take two and a half percent times, that which, gives him four thousand, seven hundred and fifty dollars. So. We add up the 25 percent of wages paid and the two and a half percent of on. Adjusted, basis in assets and we get 24,000. 750. Now, remember we get to take the greater of the. Greater up for this first part because, down here the. Rule stay the. Limit is the greater of of these of whichever, one of these is higher so. Obviously, if you pass math class $40,000. Is higher so, that's the number we're gonna work with in this example so let's let's go down to this is step one now. Let's come down to step two and let's figure this out now what we need to do is figure out what the max qpi, deduction, would be so. We, know that chippers, qualified. Business income is two hundred ninety thousand, and remember that two hundred ninety thousand comes from up here right there, so. We take 20% of that so. 20%, of two hundred ninety thousand is fifty. Eight thousand, dollars folks so now we're going to take the lesser, of the max qualified, business income action or, the. 50% of wages and we're. Taking the 50% of wages here because, this was the greater of the numbers in step 1 if, this, number if this test had, come out higher we. Would be using that example down here instead but because of the $40,000. And if if 50% and wages higher we're gonna use that amount so just want to make that clear and with the lesser of the $58,000, or, the $40,000, which is less, $40,000. Is less than 58 thousand dollars clearly, all, right that's step 2 now we're gonna go into the step 3 and we're gonna start, to finalize this calculation. So that was step 2 now let's go on to step 3 and we're getting close to being done with this calculation, now.
What We need to do is we need to calculate the 20% max deduction, based, on the tax base, on chippers tax link um well, chippers taxable income we know is, 260,000. And that number is coming from right here because, that's what was given that's, what I gave you guys as the example that's chipper taxable income so, 20%, of. $260,000. Is, $52,000. Right so we know that $40,000. Is less than 52,000. Dollars right our maximum. Qbi deduction, in this. Example, in example number 5 is. $40,000. So. What this means is that chipper, could reduce his taxable, income with. This qualified business income deduction, by, $40,000. And he's going to report that on line, 9 all, right guys well, I just walked through a couple, examples with you guys the. Most complex, example, in this whole worksheet is actually example number 4 and you. Guys can see you can walk through this example in your own time you can pause the video you can download the this spreadsheet for yourself for free like. I said I'll link it up down below for you guys and this. Will go through step by step by step there's actually this is a five-step. Calculation. In this part so that's why I don't want to cover it all on camera or, on screen because it's this gonna take too much time but you guys can study that for yourself so we've looked at an easy one we've looked at where, the, when chipper is as income. Is below the phase-out ranges we've, looked at an example where chippers income, is in. Example number two where it's below the phase-out, ranges, and, Annie has a little Apple Gaines have how that changed changes, the calculation, a little bit in. Example, two or I mean I'm sorry an example three we, looked at when shippers income, is between the income phase-out ranges and he's. In a specified, service trade or business an example, five we. Covered, when, chipper is not. In a specified service trader business and his, income is over the. Phase-out of mounts and how, these. Other deductions. Now these other tests have to come into play when when we take the we, have to come look, at the fifty percent of wages or twenty. Five percent of wages plus two and a half two, and a half percent of on adjusted basis hopefully this stuff makes sense guys remember, feel free to ask questions down, below I've, done my best to explain this but like I said truly, the, best way to learn it now is to go back and study this stuff for yourself in your own time, look, at the Microsoft, Word handout, that I created for you for free read. The rules and then look at these examples and, give yourself some time and, it's gonna start to make more sense now in the handout or in this spreadsheet, I've included links, for you guys if you want to learn more about this one and at nine eighty deduction, there's, a couple links that where I've pulled this information, together it doesn't, show up here yet but, I'm going to have. A link to the video for part one and I'm, gonna have a link, for the word document, handout, that you for, Dropbox that you can find in here as well so just make sure you check out this link section of the worksheet there's a lot of good information, let's, just talk real briefly about, having multiple businesses, okay so, if you're a business owner and this deduction is meant for business owners as you guys know if you watch the part number one if you have multiple businesses you would have to do this calculation for every, business you own okay.
So For every business you own you would do this calculation, but. If you, there's also aggregation. Rules so, for, some people for some tax payers they. Have multiple businesses and their. Income is really high so, their income is like above let's say they're married filing joint and their income is like six hundred thousand dollars so there are ways to aggregate, there's, an election that you can make on next year's tax return are the 2018, tax return that, will allow, you to aggregate, the activities, of all, your qualified, business income, activities, and that, may or may not give you a higher. Qpi deduction, if you aggregate now if you a great to my understanding once, you elect the aggregate you have to keep doing that going forward and you can't change it and this deduction guys is gonna be in play for the next ten you're on I won't say next ten years but it's supposed to be in play until, 2000, until the end of 2025. And, at that point or beyond that starting, in 2026. I don't know if they're gonna scratch. All this or not I have no idea all right guys I've probably tucked your ear off at this point so. Now it's time to hear from you guys so in the comments section down below let, me know your thoughts about this new deduction, let, me know if you have any questions, I'm sure you're gonna have questions to, run by me if I if I can answer on my will as far as I know these, calculation, examples I put in this video are correct there's always a chance I can make mistakes so, you know do not consider, this to be legal or tax advice none, of this in this video is to be taken as legal or tax advice always do your own homework do your own research consult. With an accountant in the area you live you know if you want to learn more about the stuff this video was made to help you guys understand, how the deduction. Works and I think one of the best ways to learn how it works is to actually work through the calculation, examples, so, then you can look at your own business and say okay well this is activity I've got going on these are the wages I pay this, is where I expect my taxable income to be for the year to, help you determine if, your, calculations, gonna be as easy as an example 1 or 2 or if your calculations, gonna be really complex like a number like an example is 3 & 4 or even 5 all right everyone well I'm gonna end the video right here, let me know what you guys think about all this stuff I look forward to reading your comments if you liked the video make sure you leave me a like it really helps me out share, this information with a friend especially if you have a friend who owns a business this. New tax reduction is going to save a lot, of people a lot of money in taxes, on this channel we help people like yourself become, fiscally fit so, to join our community and not miss any of our future uploads and make sure you just hit that red subscribe button down below thank you so much everybody for hanging out with me here on YouTube it's always a pleasure it's always honor I hope you guys have a great week hope y'all chill and I'll see you in the next episode, and take this information and, use it to. Live your life on cage, bye. Guys peace. You.