How Can I Get a Qualified Business Income Deduction?
The 2017 Tax Cuts and Jobs Act includes a new tax deduction for business owners. It’s called the Qualified Business Income Deduction, also called a Section 199A deduction or QBI deduction.
Here’s an overview of this new business tax deduction:
- The QBI deduction is for business owners. It can be up to 20% of qualified business income (QBI).
- The deduction can be taken in addition to the usual allowable business expense deductions.
- It’s for pass-through businesses (sole proprietors, LLC owners, partners, and S corporation owners) but not for corporations.
- It may be limited or not applicable for higher-income individuals.
- This deduction is in effect for tax years 2018 through 2025.
What Is Qualified Business Income?
According to the IRS, “QBI is the net amount of qualified items of income, gain, deduction and loss from any qualified [U.S.] trade or business. Only items included in taxable income are counted.”
Several factors determine whether your business qualifies for this tax deduction:
- First, you need to determine if your business type qualifies.
- Then you have to know the amount of net income from that business for the year. Some business income isn’t included, as described below.
- Then you have to know your total taxable income as a taxpayer for the year. If your income is over the limit (described below) the amount of the deduction may be reduced or eliminated.
Only pass-through businesses can take this deduction. In pass-through businesses, the income from the business is taxed on the owner’s personal tax return. Pass-through businesses are:
Corporations are not eligible for the QBI deduction, because the corporation’s income is taxed separately from that of the owner.
Income Type and other Limits and Exclusions
The deduction you can take also depends on the amount of qualified business income (QBI), which is basically your business net income for the year. But for this purpose you can’t count:
- Business income from outside the U.S.
- Income from business investments
- W-2 income (wages) paid to an S corporation owner
- Guaranteed payments to a partner
Some other types of business income may be excluded from the QBI deduction but may be eligible for other deductions.
The QBI deduction may be limited by the amount of wages paid to employees and the cost of some property owned and recently purchased by the business, called “unadjusted basis immediately after acquisition (UBIA).”
The QBI deduction is only on business income for federal income tax purposes, and it doesn’t include a deduction from self-employment tax.
Total Personal Taxable Income
To qualify for this tax deduction, owner total income from all sources must be below limits set by the IRS. Total owner income includes employment income and capital gains, not just business income. The limit for total taxable income for single tax filers is $157,500 a year and for married couples, it’s $315,000 a year. Yes, that means your spouse’s income is also considered. Income above this amount is reduced or eliminated (by a complicated formula).
Some types of businesses, called Specified Service Trades or Business (SSTB’s) may not be eligible for the entire QBI deduction if the income of the owners is above the limits. These SSTB’s include businesses involving the performance of services (think: health, law, accounting, performing arts, consulting, athletics, financial services, investing), in other words, a trade or business founded on the reputation or skill of one or more employees or owners.
How Is the QBI Deduction Calculated?
Here’s a simple example:
Calvin is a business owner who files taxes as a single taxpayer and who owns a single-owner LLC (taxed as a sole proprietor on Schedule C):
- Calvin has a total qualified income from his business of $70,000.
- He also has wages from a part-time job of $20,000.
- His total taxable income is $90,000. This is under the limit so the $157,500 limit, so the entire $70,000 can be used in the QBI calculation.
- Multiply the $70,000 by 20% to get the QBI deduction amount of $14,000.
Calvin can still take the allowable business expense deductions on his Schedule C, in addition to the QBI deduction.
How Does the QBI Deduction Get Onto My Tax Return?
The Qualified Business Income Deduction is calculated on a worksheet that is included with IRS Form 1040 Instructions. Then, the total from the worksheet is entered on Line 9 of the owner’s 1040 form.
S corporation owners and partners (including members of an LLC with multiple owners) calculate the QBI deduction differently. First, the total QBI for the business is calculated. Then each owner’s share of the QBI is calculated and entered in a separate line on the owner’s Schedule K-1, along with other income of the owner. Then the information on the Schedule K-1 is entered with the owner’s other income on the owner’s personal tax return.
More Information From the IRS
This article is a general overview of the Qualified Business Income Deduction. The calculation for this deduction is complicated and it’s different for each specific business. To find out if you qualify and to get help with the calculation, use tax preparation software or a tax professional.