Are Physicians Eligible For QBI Deduction?
Are physicians eligible for the Qualified Business Income (QBI) deduction? It depends. The availability of the QBI deduction for physicians depends on their taxable income and whether their medical practice is considered a specified service trade or business (SSTB).
Introduction to the Qualified Business Income (QBI) Deduction
The Qualified Business Income (QBI) deduction, also known as the Section 199A deduction, was introduced as part of the Tax Cuts and Jobs Act of 2017. It allows eligible self-employed individuals and small business owners to deduct up to 20% of their qualified business income. This deduction aims to level the playing field between larger corporations, which received a substantial tax cut under the same act, and smaller, pass-through entities. Determining whether or not are physicians eligible for QBI deduction is critical for tax planning.
Is Medicine a Specified Service Trade or Business (SSTB)?
The question of whether are physicians eligible for QBI deduction hinges heavily on whether their practice is classified as a Specified Service Trade or Business (SSTB). An SSTB is defined as any trade or business involving the performance of services in the fields of:
- Health
- Law
- Accounting
- Actuarial science
- Performing arts
- Consulting
- Athletics
- Financial services
- Brokerage services
- Investing and investment management
- Trading, or dealing in securities, partnership interests, or commodities.
Because medicine falls under the “Health” category, physician practices are generally considered SSTBs. However, the SSTB classification only limits the QBI deduction for taxpayers with taxable income above certain thresholds.
Income Thresholds and the QBI Deduction
The QBI deduction limitations based on SSTB status apply only to taxpayers whose taxable income exceeds specific thresholds. For 2024, these thresholds are:
- Single Filers: $191,950
- Married Filing Jointly: $383,900
Phase-In Range: The QBI deduction phases in as taxable income falls within a range above these thresholds. The ranges are:
- Single Filers: $191,950 – $241,950
- Married Filing Jointly: $383,900 – $483,900
Deduction Allowed/Disallowed:
| Taxable Income (Single) | Deduction |
|---|---|
| Under $191,950 | Full QBI deduction available, regardless of SSTB status. |
| $191,950 – $241,950 | Deduction may be limited due to SSTB status; requires calculation. |
| Over $241,950 | No QBI deduction allowed if the practice is an SSTB. |
| Taxable Income (Married Filing Jointly) | Deduction |
|---|---|
| Under $383,900 | Full QBI deduction available, regardless of SSTB status. |
| $383,900 – $483,900 | Deduction may be limited due to SSTB status; requires calculation. |
| Over $483,900 | No QBI deduction allowed if the practice is an SSTB. |
Physicians with taxable income below these thresholds are eligible for the QBI deduction, regardless of their practice being an SSTB. Physicians with taxable income above the upper limit are not eligible for the QBI deduction if their practice is considered an SSTB. The deduction is partially available within the phase-in range, requiring complex calculations based on a number of factors.
Calculating the QBI Deduction for Physicians
Calculating the QBI deduction involves several steps:
- Determine Qualified Business Income (QBI): This is the net amount of income, gains, deductions, and losses from the qualified trade or business.
- Calculate 20% of QBI: This is one limit on the deduction.
- Calculate 20% of Taxable Income (before the QBI deduction) minus Net Capital Gains: This is another limit.
- Determine the QBI deduction: This is the lesser of the two amounts calculated above.
For physicians with income within the phase-in range, further calculations are needed to determine the applicable percentage limitation based on SSTB status. Software programs and professional tax advisors can greatly assist with these complex calculations.
Common Mistakes and How to Avoid Them
- Incorrectly Determining QBI: Ensure all business expenses are properly documented and deducted to arrive at the correct QBI amount.
- Misunderstanding SSTB Rules: Be aware of whether your medical practice qualifies as an SSTB based on your taxable income.
- Failing to Consider Wage and Property Limitations: For higher-income taxpayers, the QBI deduction can be limited by the amount of wages paid and the unadjusted basis of qualified property used in the business. This is most relevant when income is over the phase-in range.
- Not Seeking Professional Advice: Given the complexity of the QBI deduction, consulting a qualified tax advisor is highly recommended.
Strategic Tax Planning for Physicians
Physicians can explore various strategies to potentially increase their QBI deduction or mitigate its limitations. These include:
- Managing Taxable Income: Strategies to reduce taxable income, such as maximizing retirement contributions, can bring taxable income below the thresholds for SSTB limitations.
- Structuring the Business: The structure of the medical practice (e.g., sole proprietorship, S corporation) can impact the QBI deduction. While changing structure may not always be beneficial, it is worth considering.
- Optimizing Business Expenses: Ensure all legitimate business expenses are deducted to reduce QBI and potentially increase the deduction amount.
Frequently Asked Questions (FAQs)
What constitutes “qualified business income” for a physician’s practice?
Qualified business income is generally the net profit from your medical practice after deducting ordinary and necessary business expenses. It includes income from providing medical services, but does not include certain items like capital gains or losses, interest income not directly related to the business, or wage income if you are an employee of your own S-corp.
If my medical practice is an S-corp, am I still eligible for the QBI deduction?
Yes, if your practice is an S-corp, partnership, or sole proprietorship, you’re generally eligible to claim the QBI deduction, subject to the income limitations and SSTB rules. You cannot, however, take the deduction on wages you receive as an employee of the S-corp.
How does the type of business structure (sole proprietorship, partnership, S-corp) affect the QBI deduction?
The type of business structure itself doesn’t directly change the calculation of the QBI deduction. However, it does affect how income is reported and how certain deductions are taken. For instance, self-employment taxes are handled differently in a sole proprietorship versus an S-corp, which can impact overall taxable income.
What happens if my taxable income is just slightly over the threshold for SSTB limitations?
If your taxable income falls within the phase-in range, the SSTB rules only partially limit your QBI deduction. The deduction isn’t entirely disallowed, but a complex calculation must be performed to determine the allowable deduction. Seek professional assistance, as it is nuanced.
Can I deduct health insurance premiums as a business expense to increase my QBI deduction?
Yes, self-employed health insurance premiums are generally deductible above-the-line, which reduces your adjusted gross income (AGI) and, consequently, your taxable income. This may help you qualify for or maximize your QBI deduction.
Are there any specific medical practice expenses that are often overlooked when calculating QBI?
Commonly overlooked expenses include home office deductions (if applicable), depreciation deductions, professional development expenses (conferences, seminars), and retirement plan contributions. Thorough record-keeping is crucial to capturing all eligible deductions.
How do I know if my medical practice qualifies as a “specified service trade or business (SSTB)”?
Because medicine is explicitly listed as a health-related service, nearly all physician practices will meet the definition of an SSTB. However, the SSTB classification only matters if your taxable income exceeds the thresholds discussed previously.
What documentation do I need to claim the QBI deduction?
You’ll need documentation to support your QBI calculations, including profit and loss statements, balance sheets, and records of all business income and expenses. You’ll also need to file Form 8995 or 8995-A with your tax return. Consult with a tax professional to ensure you have the correct forms and documentation.
Can I amend a prior-year tax return to claim the QBI deduction if I didn’t take it initially?
Yes, you can amend a prior-year tax return by filing Form 1040-X to claim the QBI deduction if you were eligible and didn’t take it initially. There are time limits, so it’s best to do this as soon as possible after discovering the error.
What is the difference between Form 8995 and Form 8995-A, and which one should I use?
Form 8995 is a simplified form used by taxpayers with taxable income below the SSTB thresholds. Form 8995-A is more detailed and required for taxpayers with taxable income above those thresholds or who are claiming the QBI deduction from a qualified REIT dividend or publicly traded partnership (PTP).
Does the QBI deduction affect my self-employment tax?
No, the QBI deduction is taken after calculating your self-employment tax. It does not reduce the amount of income subject to self-employment tax.
Where can I find reliable information and resources about the QBI deduction for physicians?
The IRS website (IRS.gov) is the primary source for official information on the QBI deduction. Publication 535 (Business Expenses) and the instructions for Form 8995 and Form 8995-A provide further details. Additionally, consulting with a qualified tax advisor or CPA specializing in healthcare is highly recommended.