If you’ve been on the physician communities for a while, you know that given the amount most physicians pay in taxes, doctors often wonder about tax deductions that they may be able to take advantage of. In response to those questions, you’ll almost always see a counter question asking if a physician receives 1099 or W2 income, or if they’re involved in real estate, as the tax code is really written to favor business and real estate owners when it comes to deductions. As W2 physicians only have access to a few tax strategy options, we often recommend adding side gigs and 1099 income as a way to maximize deductions if tax savings are a priority for you.
In the 2017 Tax Cut and Jobs Act, a powerful and potentially huge tax deduction option came into play called the qualified business income (QBI) deduction, also known as Section 199A deduction. This is a very complicated topic, and you will most likely need an accountant that is familiar with businesses and tax strategy to help you navigate it, so this article is not a comprehensive resource, but more for you to determine whether you should dig deeper. We’ll go into why the QBI deduction is so powerful, who is eligible, and strategies to maximize this deduction if you’re able. Of note, as of now, the QBI deduction is set to expire at the end of 2025 unless extended by Congress, so plan accordingly.
As always, you should consult appropriate expertise before taking action based on this content, which is not individualized to your personal situation and can not be guaranteed to be accurate or up to date. While we have attempted to explain this to the best of our ability, we are not accountants and this is complex information that can be misinterpreted or unclear. To learn more, visit our disclaimers and disclosures.
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What is the QBI (AKA Section 199A) Deduction?
Put simply, the qualified business income deduction (QBI) is a tax deduction available to select self-employed persons and small business owners that allows them to deduct up to 20% of qualified business income on their tax returns. As you can imagine, this number can add up a very large amount, and could easily become one of the largest tax deductions available to you as a physician. Importantly, it can be taken on top of the standard deduction even if you don’t itemize your deductions, assuming you qualify. How much you can actually deduct is discussed below, as how much of the potential 20% you can take depends on your income level (taxable income), what the nature of your business is, how much your business pays out in W2 wages, and if applicable, how much “qualified property” your business owns.
Who is eligible for the QBI Deduction?
Of course, as with most large tax deductions, this is not a straightforward deduction. It comes with many rules, many of which are nuanced.
Let’s start with the straightforward eligibility:
You must have a business. This can be a sole proprietorship, a limited liability company such as an LLC, a partnership, or an S corporation. Notably, C corporations do not qualify.
You must have qualified business income (defined below)
You qualify to take the QBI deduction for 2024 if your taxable income in 2024 is less than or equal to $191,950 for single filers and $383,900 for married filing jointly.
If you are above these limits, there are additional qualifications you must meet to take the QBI deduction.
As you can imagine, many single physicians or dual income families, or even physicians filing jointly but in higher paying specialties, would not qualify based on this criteria. However, even large multimillion dollar businesses take advantage of this deduction. So how do they do that?
If your total income is above the limits listed above, you are only able to claim the QBI deduction based on the exact nature of your business, and even then, the maximum amount you can take will be subject to certain rules discussed below (but which should really be discussed with an accountant).
What counts as qualified business income?
Qualified business income is basically the net profit of your business, though the IRS has a more specific definition that outlines certain things that do not qualify, including interest income, capital gains or losses, dividends, income earned outside of the United States, and certain other things that are beyond the scope of this article. Also remember that the net profit of your business doesn’t include the amount that was paid in W2 wages, including to yourself, as those are written in your taxes as expenses to the business and will be subtracted from your gross income to calculate net profit.
Interestingly, there is a carveout within this that specifically allows REITs to qualify for a deduction of up to 20 percent of that income, which gets added to the QBI deduction calculated otherwise, which is an added bonus for those physicians investing in passive real estate through REITs.
How do I qualify for the QBI deduction if I make more than the normal income limits?
The rules here get very complicated, and you should confirm all of these and their relevant phaseouts and conditions with an accountant that is experienced with the QBI deduction. Not all accountants will feel comfortable with this, so it would behoove you to ask specific questions about who their clients are that utilize this deduction when interviewing an accountant. The rules are different depending on the type of business you have.
Specified Service Trade or Business (SSTB)
First of all, your income has to be earned from a qualified trade or business, and this is where it gets tricky for physicians, many of whom will be disqualified if their businesses include services as a physician or some of our most common side gigs.
Your income will either be classified as a “specified service trade or business (SSTB)” or not. There is a long list (as well as some confusion) about where certain professionals fall, but physicians and medical practices are specifically classified as a SSTB, as are many others who provide personal 1 on 1 services like lawyers, accountants, financial advisors, consulting firms, and other healthcare professionals. There’s also some other groups that are excluded because their services are so highly specialized that they are the only ones that can do them and are not readily replaceable. This includes professional athletes and actors, for example.
There are some side gigs that fall into a grey zone where accountants would debate whether you are an SSTB or not, like those getting paid for speaking or endorsements based on their celebrity status. It’s best to talk to your accountant and tease out the specifics of what may or may not qualify and pass the ‘sniff test’ by the IRS based on their criteria. Visit the IRS website to learn more about what the IRS counts as an SSTB.
If you are characterized as an SSTB, your ability to use the QBI deduction is phased out at certain income levels. For the 2024 tax year, this is a total taxable income of $241,950 if you’re single, and $483,900 if you’re married filing jointly. Below these levels, you may be able to use it, but it will be subject to certain criteria and may be reduced.
Put simply, for 2024 earnings:
If your taxable income in 2024 is less than or equal to $191,950 for single filers and $383,900 for married filing jointly:
You can take the full 20 percent QBI deduction regardless of whether you are an SSTB or not
If your business is an SSTB and your total taxable income from all sources is greater than $241,950 for single filers or greater than $483,900 for married filing jointly
You do NOT qualify to take the deduction for SSTBs
If your business is an SSTB and your total taxable income is between $191,950 and $241,950 for single filers or between $383,900 and $483,900 if married filing jointly,
You will qualify for a limited deduction, based on the calculation below under the non SSTB section QBI limitations.
For the 2023 tax year:
Not a Specified Service Trade or Business (non SSTB)
If your taxable income in 2024 is less than or equal to $191,950 for single filers and $383,900 for married filing jointly, you can take the full 20 percent QBI deduction when you file 2024 taxes in 2025 regardless of the rules below.
Good news for high earning physicians who own businesses outside of their jobs as physicians that do not qualify as SSTB. In this case, even if you have taxable income greater than those limits in the prior section, you can take a QBI. That said, your QBI deduction is limited to the greater of
50% of your share of the total W2 wages paid out to yourself and other employees by your business, or
25% of your share of the total W2 wages paid out to yourself and other employees by your business plus 2.5% of the value of the “qualified property” that your business owns
Qualified property means any property that you can touch and which is depreciable according to IRS rules, but hasn’t yet been completely depreciated (usually 10 years, but for real estate can be up to 39 years).
You will then compare the number you arrive at above to 20% of your QBI, and deduct the smaller amount of the two.
There are additional rules, because although you can take the QBI up to 20% of your taxable income from your business, the total QBI deduction claimed on the final line in your taxes also can’t add up to more than 20% of your total taxable income that you come to on Form 1040. In most cases for physicians, this won’t be a problem, but if you have other businesses or deductions that are reducing your taxable income, such as some of the fancier tax deductions from real estate, you may not be able to take the full 20% deduction of your business income.
As you can see, again, this can all get very complicated, so again, so make sure you check carefully with the IRS rules or talk to an experienced accountant.
Opportunities for Tax Planning
If you look at the ways that the QBI deduction is calculated, you can see that there are many levers that tax strategists will pull and adjust to maximize the QBI deduction you can take, given that it is such a large deduction if you have a significant amount of business income. Remember, the things that go into determining your QBI deduction eligibility and amount that you can control are:
Your taxable income
Your W2 wages
How much qualified property your business owns
Whether your business is an SSTB or not
Therefore you can see how lowering your taxable income through careful tax strategy such as contributing to pretax retirement accounts, taking more 1099 related deductions, owning real estate, or charitable giving may make you more eligible for the deduction.
Additionally, hiring more employees or paying yourself more through your business will increase the 50% of your total W2 income paid that caps out how much you can deduct in cases where your income limits prohibit you from taking the full 20% without rules.
And of course, if you’re a highly paid physician, all the more reason to add a side gig that is a non SSTB so that you’re eligible for QBI that you wouldn’t have been eligible for through your physician income. Didn’t think we’d get through this article without a plug why we think side gigs have benefits, right?
Conclusion
The QBI deduction offers a large tax benefit for physicians with businesses, and should definitely be explored. However, it is complicated, and you should be aware of all the nuances and speak to an experienced accountant prior to assuming that you can utilize this powerful tax deduction.
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