If you’re an ecommerce business owner, there’s one tax deduction you may have been missing entirely, and it could save you tens of thousands of dollars every year.
It’s called the Qualified Business Income (QBI) Deduction.
Let’s talk about what it is, who qualifies, how to calculate it, and how to use it strategically.
The Qualified Business Income Tax Deduction, also called the Section 199A Deduction, is a tax move that allows eligible business owners to deduct 20% of their qualified business income from their taxable income.
It applies to pass-through business income, which refers to any income that goes through to your personal tax return, instead of being taxed at the corporate level.
So, let’s say your business made $300,000 in qualified income. You might be able to deduct up to $60,000 from this figure before calculating how much you owe in federal income taxes.
That’s not a small number. And you’ll feel its impact on your tax return.
Business owners tend to zero in on revenue and ignore taxes until it’s too late.
They find out in March what they owe in April, and they’re shocked. By then, there’s nothing left to do but file the return.
Here’s why the QBI Deduction is one of the biggest tools small business owners can utilize:
But there’s a catch. It doesn’t work automatically. You have to determine whether you’re qualified, calculate it correctly, and plan around it proactively. Come tax season, there’s no going back and changing past decisions that would have increased your deduction.
Plan your taxes strategically to get significant tax savings.
Go from tax scramble to tax strategy with our tax team, led by an expert CPA with over 25 years of experience. We’ll help you plan your taxes proactively and make the most of the tax tools available for you.
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The QBI Deduction applies to pass-through income.
So if your business is structured as a:
You’re qualified to claim.
However, there are other layers to consider as well, such as:
If you’re making more than the IRS-set income threshold, run your numbers with your CPA or get ecommerce tax planning services to determine how much to pay yourself in W-2 wages. It’s not something to guess at, as it directly impacts how much you’re qualified to deduct.
We’ve just talked about the IRS capping your QBI Deduction. And one of the scenarios where that can happen is if your business falls under this specific category: Specified Service Trade or Business (SSTB).
In this case, your QBI Deduction can get restricted or eliminated entirely once your income exceeds the threshold.
According to the IRS, an SSTB is any business providing professional services in fields such as:
If you’re an ecommerce seller, the good news is that selling physical or digital products generally doesn’t count as an SSTB.
If, however, you’re running a hybrid operation, such as if you’re a coaching business that sells digital products, things can get murky. Talk to your CPA if you’re unsure whether your business qualifies as an SSTB.
Calculating your QBI Deduction can be complex, depending on your situation.
But here’s a simplified guide to help you understand what your numbers should be:
Your qualified business income is your net income. This means your business revenue, minus:
This step is usually where business owners get tripped up.
If your books are a mess, your QBI will be wrong. So if you’re dealing with messy books or outdated data, your best move is to get it sorted with a reliable bookkeeping company.
If your net income is below the income threshold or you’re not classified as an SSTB, you’re eligible to claim the full 20% deduction.
For example:
$200,000 QBI ✖️20% = $40,000 QBI Deduction
In the case that you exceed the income threshold, these limitations apply to you, and your QBI Deduction gets capped.
That limit is determined by whichever of these is greater:
If you’re an S Corp, you have a real advantage here. You can pay yourself a reasonable W-2 wage to expand your deduction ceiling.
There’s one final cap to your QBI Deduction: It can’t be more than 20% of your taxable income, minus capital gains.
So, your actual QBI Deduction is whichever of these is lesser:
That’s it.
Once you’ve determined which applies to you, you now know the actual amount you can deduct from your taxable income.
Earlier, we mentioned how you need to plan for your QBI Deduction proactively. While you can claim it at the last minute, the real savings come from planning around it all year.
Here’s how to approach this tax deduction strategically:
This is exactly what makes EcomBalance Tax different. We align bookkeeping with a proactive tax strategy, making sure they work with the same financial picture. Nothing gets lost in translation, and you get better outcomes.
More questions about the QBI Deduction? You might find the answers here:
If your business is classified as an SSTB, your income level determines your deduction cap.
Making below the income threshold means you still get the full deduction. Exceed that range, and your deduction starts to shrink as your income goes higher.
You can definitely claim the QBI Deduction for multiple businesses. Each business generates its own QBI.
For SSTB businesses, your deduction gets eliminated once your income exceeds the phase-out range.
For non-SSTB businesses, the deduction doesn’t disappear, but instead gets capped by your W-2 wage level and physical assets.
The QBI Deduction is one of the most significant tax tools available to ecommerce sellers who operate pass-through businesses.
It’s not as complicated as it sounds once you understand the framework behind it, but it does require three things to work properly:
If you’re running a 6- to 8-figure business and you’re not actively planning around QBI, or you’re not sure whether your books are accurate enough to support the right calculation, we’re here to help.
With decades of experience in ecommerce tax filing, planning, and strategy, our expert tax team understands what your financials need to look like when it matters most.
