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Maximizing the Qualified Business Income (QBI) Deduction for Physicians

Maximizing the Qualified Business Income (QBI) Deduction for Physicians

July 05, 2023

As a physician, you work hard to provide quality healthcare services to your patients. However, managing your finances and understanding the complex tax laws that apply to your business can be challenging. One tax deduction that you should be aware of is the Qualified Business Income (QBI) deduction. In this article, we will explain what QBI is, who is eligible for this deduction, and how you can maximize your QBI deduction to reduce your taxes. 

What is the QBI deduction? 

The QBI deduction is a tax deduction that allows eligible taxpayers to deduct up to 20% of their qualified business income, including income from partnerships, S corporations, sole proprietorships, and certain trusts. The deduction reduces taxable income, which can lower the amount of taxes owed. The QBI deduction was introduced as part of the Tax Cuts and Jobs Act in 2017 to provide tax relief for small business owners. 

Who is eligible for the QBI deduction? 

Physicians who operate a business or practice as a sole proprietorship, partnership, S corporation, or limited liability company (LLC) are generally eligible for the QBI deduction. However, there are income thresholds and other limitations that may reduce or eliminate the deduction. 

For tax year 2021, the threshold for the QBI deduction is $329,800 for married filing jointly taxpayers and $164,900 for single filers. Taxpayers with income above this threshold may still qualify for a partial deduction, depending on other factors such as the type of business and industry. 

How can physicians maximize their QBI deduction? 

To maximize your QBI deduction as a physician, you should consider some of the following strategies: 

Evaluate your business structure 

The QBI deduction is affected by the type of business structure that you operate. For instance, sole proprietors can generally deduct up to 20% of their QBI, while S corporations and partnerships have more complex rules that may limit the deduction. Consult with a tax advisor to determine the best structure for your business to maximize your QBI deduction. 

Review your income levels 

As mentioned earlier, there are income thresholds for the QBI deduction. You may want to explore ways to reduce your taxable income, such as deferring income to a future tax year, taking advantage of tax deferral strategies like retirement plans or health savings accounts, or increasing business expenses to lower your profit. 

Keep accurate records and maintain good accounting practices 

To claim the QBI deduction, you need to have accurate records of your business income and expenses. Maintain good accounting practices, including regularly reconciling your bank accounts, tracking your expenses, and documenting your income sources. 

Monitor changes in tax laws 

Tax laws are subject to change, and new rules may affect your eligibility for the QBI deduction. Stay informed about possible changes and plan accordingly to optimize your tax savings. 

Final thoughts 

The QBI deduction is a valuable tax benefit for physicians who operate a business or practice. By understanding the rules and taking proactive steps to optimize your QBI deduction, you can lower your tax liability and keep more of your hard-earned income. Consult with a tax advisor to develop a comprehensive strategy that works best for your business and unique financial situation. 

 

Material discussed is meant for general informational purposes only and is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary. Therefore, the information should be relied upon only when coordinated with individual professional advice.  2023-157713