# Close-Up on the New QBI Deduction’s Wage Limit

The Tax Cuts and Jobs Act (TCJA) provides a valuable new tax break to noncorporate owners of pass-through entities: a deduction for a portion of qualified business income (QBI). The deduction generally applies to income from sole proprietorships, partnerships, S corporations and, typically, limited liability companies (LLCs). It can equal as much as 20% of QBI. But once taxable income exceeds \$315,000 for married couples filing jointly or \$157,500 for other filers, a wage limit begins to phase in.

Full vs. partial phase-in

When the wage limit is fully phased in, at \$415,000 for joint filers and \$207,500 for other filers, the QBI deduction generally can’t exceed the greater of the owner’s share of:

• 50% of the amount of W-2 wages paid to employees during the tax year, or
• The sum of 25% of W-2 wages plus 2.5% of the cost of qualified business property (QBP).

When the wage limit applies but isn’t yet fully phased in, the amount of the limit is reduced and the final deduction is calculated as follows:

1. The difference between taxable income and the applicable threshold is divided by \$100,000 for joint filers or \$50,000 for other filers.
2. The resulting percentage is multiplied by the difference between the gross deduction and the fully wage-limited deduction.
3. The result is subtracted from the gross deduction to determine the final deduction.

Some examples

Let’s say Chris and Leslie have taxable income of \$600,000. This includes \$300,000 of QBI from Chris’s pass-through business, which pays \$100,000 in wages and has \$200,000 of QBP. The gross deduction would be \$60,000 (20% of \$300,000), but the wage limit applies in full because the married couple’s taxable income exceeds the \$415,000 top of the phase-in range for joint filers. Computing the deduction is fairly straightforward in this situation.

The first option for the wage limit calculation is \$50,000 (50% of \$100,000). The second option is \$30,000 (25% of \$100,000 + 2.5% of \$200,000). So the wage limit — and the deduction — is \$50,000.

What if Chris and Leslie’s taxable income falls within the phase-in range? The calculation is a bit more complicated. Let’s say their taxable income is \$400,000. The full wage limit is still \$50,000, but only 85% of the full limit applies:

(\$400,000 taxable income – \$315,000 threshold)/\$100,000 = 85%

To calculate the amount of their deduction, the couple must first calculate 85% of the difference between the gross deduction of \$60,000 and the fully wage-limited deduction of \$50,000:

(\$60,000 – \$50,000) × 85% = \$8,500

That amount is subtracted from the \$60,000 gross deduction for a final deduction of \$51,500.

That’s not all

Be aware that another restriction may apply: For income from “specified service businesses,” the QBI deduction is reduced if an owner’s taxable income falls within the applicable income range and eliminated if income exceeds it. Please contact us to learn whether your business is a specified service business or if you have other questions about the QBI deduction.

Information provided on this web site “Site” by Thompson Greenspon is intended for reference only. The information contained herein is designed solely to provide guidance to the user, and is not intended to be a substitute for the user seeking personalized professional advice based on specific factual situations. This Site may contain references to certain laws and regulations which may change over time and should be interpreted only in light of particular circumstances. As such, information on this Site does NOT constitute professional accounting, tax or legal advice and should not be interpreted as such.

Although Thompson Greenspon has made every reasonable effort to ensure that the information provided is accurate, Thompson Greenspon, and its shareholders, managers and staff, make no warranties, expressed or implied, on the information provided on this Site, or about any other website which you may access through this Site. The user accepts the information as is and assumes all responsibility for the use of such information. Thompson Greenspon also does not warrant that this Site, various services provided through this Site, and any information, software or other material downloaded from this Site, will be uninterrupted, error-free, omission-free or free of viruses or other harmful components.

Information contained on this Site is protected by copyright and may not be reproduced in any form without the expressed, written consent of Thompson Greenspon. All rights are reserved.

Share:

This site uses Akismet to reduce spam. Learn how your comment data is processed.

### Ready to talk to one of our specialists?

Our specialists are all seasoned professionals who have years of experience working within your industry. Reach out to us today to schedule a consultation.