The optimal structure depends on your taxable income, whether your business is a specified service trade or business (SSTB), payroll levels, and capital investment. There isn't a single structure that maximizes the deduction for everyone.
Here are the main planning strategies that tax advisors commonly evaluate:
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Manage taxable income. For many owners, the biggest lever is keeping taxable income below (or within) the QBI phaseout range. This can involve:
- Maximizing retirement plan contributions.
- Timing income and deductions between years.
- Charitable giving strategies.
- Deferring bonuses or accelerating deductible expenses when appropriate.
For SSTBs (such as many law, accounting, consulting, financial, and medical practices), this can be especially valuable because the deduction may phase out completely once taxable income exceeds the applicable range.
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Review entity choice carefully.
- Sole proprietorships, partnerships, and S corporations can all qualify for QBI.
- Converting to a C corporation solely to chase tax savings is often not beneficial because C corporations do not receive the Section 199A deduction and can create double taxation when profits are distributed. The decision should consider your overall tax situation, not just QBI.
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Optimize W-2 wages (for non-SSTBs above the threshold).
Once income exceeds the threshold, the deduction may be limited by W-2 wages or by wages plus qualified property.
- Businesses with very little payroll sometimes benefit from hiring employees or increasing qualifying wages if it aligns with business needs.
- S corporation owners must still pay "reasonable compensation"; artificially manipulating wages solely for QBI purposes can create other tax issues.
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Consider qualified property (UBIA).
For capital-intensive businesses, the limitation based on 25% of W-2 wages plus 2.5% of qualified property can preserve more of the deduction than wages alone. Investment decisions, however, should make economic sense independent of the tax benefit.
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Evaluate aggregation elections.
If you own multiple related businesses, the QBI rules sometimes allow you to aggregate them. This can help when one entity has payroll while another generates most of the income, but aggregation has specific ownership and operational requirements and is generally a long-term election.
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Be cautious about separating businesses.
Years ago, some taxpayers considered "cracking" SSTBs into separate entities to preserve QBI. Treasury regulations include anti-abuse rules that can treat businesses providing services or property to a commonly owned SSTB as part of the SSTB, limiting the effectiveness of this approach.
One important recent development is that Congress made Section 199A permanent rather than allowing it to expire after 2025, so longer-term planning has become more worthwhile. The inflation-adjusted thresholds continue to change annually.
If you're looking for the most tax-efficient structure, the analysis usually starts with these questions:
- Is the business an SSTB?
- Filing status (single or married filing jointly)?
- Expected taxable income before the QBI deduction?
- Current entity (sole proprietorship, partnership, or S corporation)?
- Annual W-2 wages paid by the business?
- Amount of depreciable business property?
With those details, it's possible to discuss which restructuring options are likely to have the greatest impact on your QBI deduction.
