The Qualified Business Income (QBI) deduction‚ also known as the pass-through deduction or Section 199A deduction‚ was established by the 2017 Tax Cuts and Jobs Act (TCJA). It’s available for tax years 2018 through 2025.
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Definition
QBI is the net amount of qualified items of income‚ gain‚ deduction‚ and loss from a qualified trade or business. Essentially‚ it’s the profit your business generates‚ minus deductible expenses.
Who is Eligible?
Individuals‚ trusts‚ and estates with qualified business income are eligible for the QBID. This primarily benefits self-employed individuals and small business owners.
How it Works
Eligible taxpayers can deduct up to 20% of their qualified business income. However‚ the rules are complex and depend on factors like your total taxable income. Capital-intensive businesses with significant qualified property may be able to claim a larger deduction‚ while labor-intensive firms might rely more on wages paid to calculate the limit.
What’s Included in QBI?
QBI includes several income and expense items directly related to your business operations. Here’s a breakdown:
- Income: Revenue from sales‚ services‚ rents‚ and royalties (if the rental activity qualifies as a business).
- Expenses: Ordinary and necessary business expenses‚ such as salaries‚ rent‚ supplies‚ and depreciation.
What’s Excluded from QBI?
Not all income and expenses qualify for the QBI deduction. Here are some common exclusions:
- Capital gains or losses: These are taxed separately.
- Interest income not directly related to the business: Investment income doesn’t qualify.
- Wage income: Income you receive as an employee is not QBI.
- Commodities transactions: Certain transactions are excluded.
- Certain dividends.
- Reasonable compensation paid to the taxpayer for services rendered to the qualified trade or business.
- Guaranteed payments paid to a partner for services rendered to the qualified trade or business.
Specified Service Trade or Business (SSTB)
A Specified Service Trade or Business (SSTB) is a trade or business involving the performance of services in the fields of health‚ law‚ accounting‚ actuarial science‚ performing arts‚ consulting‚ athletics‚ financial services‚ brokerage services‚ or any trade or business where the principal asset is the reputation or skill of one or more of its employees or owners.
The QBI deduction for SSTBs is subject to limitations based on taxable income. The deduction may be limited or unavailable depending on the taxpayer’s income level.
Taxable Income Thresholds
The QBI deduction is subject to income thresholds. For 2025‚ these thresholds are subject to inflation adjustments‚ so it’s crucial to check the latest IRS guidance. Generally‚ the deduction is fully available for taxpayers with taxable income below a certain threshold. Above that threshold‚ the deduction may be limited or phased out‚ especially for SSTBs.
Calculating the QBI Deduction
Calculating the QBI deduction involves several steps:
- Determine your QBI: Calculate the net amount of qualified income‚ gains‚ deductions‚ and losses from your qualified trade or business.
- Calculate 20% of your QBI: Multiply your QBI by 20%.
- Calculate 20% of your taxable income: Before the QBI deduction‚ multiply your taxable income by 20%.
- The deduction is the smaller of the two amounts: The QBI deduction is the lesser of 20% of your QBI or 20% of your taxable income.
- Consider W-2 wage and qualified property limitations: For taxpayers with income above certain thresholds‚ the deduction may be further limited by W-2 wages paid and the unadjusted basis of qualified property used in the business.
Importance of Accurate Record-Keeping
Accurate record-keeping is essential for claiming the QBI deduction. You need to maintain detailed records of your business income‚ expenses‚ and assets to support your calculations. Consult with a tax professional to ensure you are properly calculating and claiming the QBI deduction.
This information is for general guidance only and does not constitute professional tax advice. Tax laws are complex and can change. Always consult with a qualified tax advisor to discuss your specific situation.
