No, the Employee Retention Credit does not reduce QBI wages. The ERC does not impact business income for purposes of calculating QBI. The ERC does provide an incentive for employers to keep employees on the payroll, or quickly rehire those who were laid off due to COVID-19 related circumstances. Eligible employers that pay qualified wages to their employees may claim a credit against certain employment taxes equal to 50% of the qualified wages (up to $5,000 per employee) paid after March 13 and before Jan 1, 2021, and $7,000 per month between January 1, 2021 and September 30, 2021.
How does ERC affect the calculation of QBI?
The ERC does not affect the calculation of Qualified Business Income (QBI). The deduction for QBI, which is part of the Tax Cuts and Jobs Act passed in 2017, does not take into account the expenses for wages or salaries paid to employees. This means that any wages or salaries paid do not reduce the amount of QBI and do not impact the calculation for the 20% deduction on qualified business income.
The ERC does not have any bearing on QBI, but it does provide much-needed financial assistance to employers during this time of economic hardship caused by the pandemic. Employers should consult with a tax professional to understand the full implications of the ERC and determine if they are eligible for this credit. Additionally, employers should also be aware that any qualified wages paid using ERC funds are not eligible to be used as a QBI deduction.
What is QBI?
Qualified Business Income (QBI) does not include wages, salaries, commissions, or other income earned as an employee. It does include income derived from a trade or business operated by a taxpayer; Qualified Business Income (QBI) is the net amount calculated from income, gain, deductions and losses from any qualified trade or businesses, including income from partnerships. For more information on QBI deduction, please visit the IRS site.
Does ERTC Reduce Qualified Business Income?
No. Employee Retention Credit (ERC) and Employee Retention Tax Credit (ERTC) are synonymous. It is a refundable tax credit that businesses with 500 or fewer employees can claim against certain payroll taxes for wages paid between March 13, 2020 and September 30, 2021. ERTC does not reduce QBI, and neither does it impact the calculation for the 20% deduction on QBI.
Can the ERC limit the 199A Deduction?
Section 199A of the Qualified Business Income credit is complex and uniquely qualified to each taxpayer’s circumstances. Generally speaking, the 199A can limit the Employee Retention Credit for pass-through entities. Advance planning and running some numbers are recommended in order to avoid a big tax bill that you can’t avoid or defer.
The 2017 tax reform laws tried to create a level playing field between C-corporations and pass-through entities like S-corps, allowing the latter to deduct up to 20% of QBI. However, the Employee Retention Credit can impact pass-through companies earning over the income threshold for the 199A credit ($164,900 for individuals), especially in the case of service businesses that don’t have a lot of deductions. It can only impact those entities if they claimed the 199A and also claimed the ERC.
For complete details, consult your tax professional about the best way to maximize your deductions for QBI and reduce any potential limitations of the ERC.