If you’ve ever felt the US tax system is unfair to the average filer, you’re not alone. The tax code is engineered as a set of incentives, with a distinct focus: rewarding business ownership. For W-2 employees, it’s simple: earn income and pay taxes. For business owners, recent tax reforms have expanded a range of benefits.
This blog guide explores two big tax breaks for NRIs: the Qualified Business Income (QBI) deduction and the higher SALT cap, showing how NRI entrepreneurs can benefit.
What is the QBI Deduction?
The QBI deduction is one of the biggest tax breaks on the books. In short, it allows owners of pass-through businesses (like S-corps, LLCs, and sole proprietorships) to take an automatic 20% deduction on their net business income.
Think about that: if your business earns $100,000 in net income, you may be able to simply deduct $20,000 before even calculating your income tax. It's a "free" deduction that W-2 employees simply do not have access to. It was designed as a "gift" to business owners to help them compete with corporations, which saw their own tax rates slashed.
QBI Limits for NRIs
There are two main limitations to be aware of:
- SSTB (Specialty Service Trade or Business): If your business is in a service field like health, law, accounting, or consulting, you are considered an SSTB. For these businesses, the deduction begins to phase out at higher income levels (around $200,000 for single filers and $400,000 for married couples, adjusted for inflation).
- The Wage Limit: For most other businesses, the deduction is limited to either 20% of your qualified business income or 50% of the W-2 wages paid by the company, whichever is less.
How to Maximize Your QBI Deduction as an NRI Business Owner?
- Avoid paying yourself a W-2 salary that’s too low, especially if you own an S-Corp or similar pass-through entity. The QBI deduction may be limited to 50 percent of W-2 wages paid, so underpaying yourself can reduce your potential tax break.
- Consider raising your W-2 salary if you’re close to the wage limitation. By increasing your own compensation, you may unlock a larger QBI deduction, even though you’ll pay more in payroll taxes.
- Compare the payroll tax cost against the potential increase in your QBI deduction. Often, the added deduction creates a bigger overall tax saving than the extra payroll taxes you’ll pay.
- Review your business’s eligible wages, income level, and QBI limits with a qualified accountant or tax advisor. It’s important to optimize your salary and overall compensation strategy to ensure you get the highest deduction possible for your situation.
Note: Strategic planning throughout the year can help you avoid missing out on valuable tax savings. Track business performance regularly so you can adjust your salary, business expenses, and timing of income as needed.
What is SALT Cap?
The SALT cap refers to the limit on how much state and local taxes (including income, sales, and property taxes) you can deduct from your federal taxable income if you itemize deductions. Before 2017, taxpayers could deduct the full amount paid in state and local taxes. With the 2017 Tax Cuts and Jobs Act, the deduction was capped at $10,000 per year,a change that especially impacted people in high-tax states like California, New York, and New Jersey, where annual state and local tax bills often far exceed the limit.
Notably, the cap is set at the same $10,000 for both single filers and married couples filing jointly, which can create a penalty for combined high earners in these states. As a result, many taxpayers in these regions lost the ability to deduct much of their state tax payments, leading some to opt for the standard deduction instead.
How Business Owners Legally Bypass the SALT Cap
- Many high-tax states have created Pass-Through Entity Taxes (PTET) to help business owners bypass the SALT cap.
- With PTET, your business (such as an S-corp or LLC) pays state income tax directly at the entity level, instead of you paying it personally.
- These state taxes are treated as an ordinary business expense on your federal return, making them fully deductible and not subject to the $10,000 SALT limitation.
- This approach allows NRI business owners to deduct the entire amount of state and local taxes paid by their entity, unlike W-2 employees who are limited by the SALT cap.
- Using PTET can result in substantial federal tax savings for those with high state tax liabilities.
- It is important to check state-specific PTET rules and confirm eligibility with your tax advisor, as sole proprietors and single-member LLCs may not qualify.
Conclusion
For NRI business owners, recent changes bring lasting benefits and greater certainty to tax planning. The QBI deduction is now permanent, with higher threshold limits that allow more taxpayers to claim the full benefit. Additionally, strategies like Pass-Through Entity Taxes (PTET) help business owners navigate and potentially bypass the SALT cap limitations, unlocking greater federal tax savings.
Unlike W-2 employees, business owners can leverage these provisions for significant advantages. Expert tax advice, such as that offered by iNRI, is essential to ensure you maximize available deductions and optimize your overall tax strategy.
Frequently Asked Questions (FAQs)
1. What is the QBI deduction for NRIs?
Eligible NRI business owners can deduct 20% of their qualified business income, with phase-outs starting at $197,300 (single) and $394,600 (joint). A minimum deduction of $400 applies if QBI exceeds $1,000.
2.What is an SSTB for NRIs?
SSTBs include services like health, law, accounting, and consulting. NRIs in these fields face stricter limits on the QBI deduction.
3.What is the SALT cap for NRIs?
The SALT cap limits deductibility of state and local taxes on federal returns, significantly impacting NRIs in high-tax states by restricting these deductions.
4.How do NRI business owners bypass the SALT cap?
By electing Pass-Through Entity Tax (PTET), NRIs can have their business pay state taxes directly, deducting them federally and bypassing the SALT cap.
5.Can NRI W-2 employees use QBI or PTET?
No. These tax benefits are only for eligible business owners with qualifying pass-through entities, not for W-2 employees.
