Calculating the Qualified Business Income (QBI) is a critical step for many taxpayers, particularly those operating as sole proprietorships, partnerships, S corporations, or limited liability companies (LLCs)․ Under the Tax Cuts and Jobs Act, eligible taxpayers may be entitled to a deduction of up to 20% of their QBI․ This guide outlines the fundamental steps to determine your QBI․
Table of contents
Define Qualified Business Income
QBI is the net amount of qualified items of income, gain, deduction, and loss with respect to any qualified trade or business․ It generally includes:
- Net profit from a business․
- Income from partnerships (Form 1065, Schedule K-1)․
- Income from S corporations (Form 1120S, Schedule K-1)․
Importantly, QBI excludes items such as capital gains or losses, dividends, interest income, and reasonable compensation paid to the taxpayer by an S corporation․
Determine Your Net Qualified Income
To calculate your QBI, you must first aggregate the net income from your qualified businesses․ If you operate multiple businesses, you may aggregate them if they meet specific IRS criteria regarding common ownership and operational overlap․ For each business, follow these steps:
- Start with your gross receipts․
- Subtract all ordinary and necessary business expenses (e․g․, rent, supplies, marketing)․
- Exclude any non-qualified income streams, such as investment income․
- Ensure that reasonable compensation and guaranteed payments are subtracted from the gross income of the entity․
Consider Income Thresholds
The calculation complexity depends on your total taxable income․ The IRS sets annual thresholds for QBI deduction eligibility:
- Below the Threshold: If your taxable income is below the statutory threshold, you generally qualify for the full 20% deduction without complex limitations․
- Above the Threshold: If your income exceeds the threshold, the deduction may be limited based on W-2 wages paid by the business or the unadjusted basis of qualified property․
Evaluate Specified Service Trade or Business (SSTB)
Special rules apply to businesses in fields such as law, health, accounting, consulting, or performing arts․ If your business is classified as an SSTB, the deduction begins to phase out once your taxable income surpasses the established thresholds and is completely eliminated once your income exceeds the upper limit․
Final Calculation Summary
The final deduction is generally the lesser of:
- 20% of your QBI plus 20% of qualified REIT dividends and qualified publicly traded partnership income․
- 20% of your taxable income minus net capital gains․
