Qualified Business Income Deduction: How Ohio Small Businesses Can Lower Their Tax Bill

Qualified Business Income Deduction: How Ohio Small Businesses Can Lower Their Tax Bill

Every dollar saved on taxes can fuel growth for an Ohio-based small business—whether that means hiring a new team member, upgrading equipment, or boosting your marketing budget. The Qualified Business Income (QBI) deduction, introduced by the Tax Cuts and Jobs Act, allows many pass‑through entities—sole proprietorships, partnerships, S corporations, and some LLCs—to deduct up to 20% of their qualified business income. Getting this right can shave thousands off your tax bill. Here’s a deep dive into what qualifies, how to optimize your situation, and the most common missteps to avoid.

Understanding the QBI Deduction

At its core, the QBI deduction reduces your taxable income without impacting cash flow. If your small business qualifies, you can deduct up to 20% of net business income (after expenses) on your individual return. For example, a sole proprietor with $100,000 in profit could potentially deduct $20,000, lowering taxable income to $80,000.

Who Qualifies in Ohio?

Almost any pass‑through entity in Ohio can benefit, but phase‑outs and limitations apply:

• Income thresholds (2024):
  

○ Married filing jointly: $340,100

○ Single/head of household: $170,050

Below those limits, most businesses enjoy the full 20% deduction. Above the thresholds, service‑based trades—like accounting, consulting, or legal services—may see the deduction reduced or eliminated. Non‑service businesses face limits based on W‑2 wages paid and the basis of qualified property.

Four Steps to Maximize Your QBI Deduction

1. Evaluate Your Entity Structure

If you’re currently a sole proprietor or partnership, consider electing S corporation status for your LLC or converting to an S corp. That lets you split income into salary (subject to payroll taxes) and distributions (not subject to self‑employment tax), while still qualifying for the full QBI deduction. Our small‑business tax specialists can help you determine whether that election makes sense based on revenue, profits, and growth plans.

2. Maintain Accurate Payroll Records

Once income exceeds the phase‑out threshold, your QBI deduction is capped at the greater of:

• 50% of W‑2 wages paid, or
  
• 25% of W‑2 wages paid plus 2.5% of the unadjusted basis in qualified property.
  

That means every payroll entry, contractor payment, and equipment purchase matters. We’ve seen deductions slip through the cracks when businesses don’t track asset depreciation or miss W‑2 filings. Our bookkeeping services ensure your records are audit‑ready—and position you to claim the full benefit.

3. Leverage Bonus Depreciation

Accelerated depreciation methods—such as bonus depreciation or Section 179 expensing—can boost your qualified property basis, increasing the 2.5% calculation. If you’re planning to buy new machinery or vehicles before year‑end, timing those purchases can directly boost your QBI deduction. Our tax preparation services include proactive planning to align asset acquisitions with overall tax strategy.

4. Stay Ahead of Phase‑Outs

If your projected taxable income creeps into the phase‑out zone, there are planning moves to consider:

• Deferring income into the following tax year
  
• Accelerating deductible expenses, like health insurance premiums
  
• Hiring family members or part‑time staff to increase your W‑2 wage base
  

By monitoring income throughout the year, we adjust strategies proactively and keep your numbers on track rather than scrambling at tax‑filing time.

Common Pitfalls and How to Avoid Them

1. Commingling personal and business funds. Always use separate bank accounts and credit cards.
   
2. Underreporting wages. Paying yourself entirely via distributions can trigger IRS scrutiny.
   
3. Neglecting fixed‑asset records. A clear depreciation schedule prevents missed deductions.
   
4. Overlooking changes in IRS guidance. Rules on aggregation, REIT dividends, or partnerships can evolve—stay informed.
   
5. Waiting until year‑end. Early planning is the key to maximizing deductions and avoiding last‑minute surprises.
   

When to Partner with a Specialist

Every business is unique, and QBI rules can be especially complex for multi‑owner entities, businesses with multiple income streams, or those operating in specified service trades. If you want peace of mind that no deductions are left on the table, let’s talk. Our team specializes in helping Ohio entrepreneurs leverage every tax‑saving opportunity.

Saving on taxes isn’t about loopholes—it’s about understanding the rules and applying them to your advantage. Ready to see how much you could save with the QBI deduction? Contact Hogan CPA for a customized strategy session and keep more of what you earn.