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), minus net capital gain.
- The deduction can be taken in addition to the normally allowable business expense deductions.
- It’s for pass-through business owners who pay business taxes on their personal tax returns, 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 you qualify for this tax deduction (details below):
- 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.
- Then you have to know your total taxable income as a taxpayer for the year. If your income is over the limit the amount of the deduction may be reduced or eliminated.
Although QBI eligibility discusses businesses, the deduction is for business owners, not the business. The total income of the owner from all sources is counted in determining eligibility for this deduction.
Business Types and QBI Deductions
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:
- Sole-proprietors and single-owner LLCs filing federal income taxes on Schedule C.
- Partnerships and multiple-member LLC’s filing partnership returns.
- S corporations filing Form 1120-S.
S corporation shareholders can take the QBI on their personal tax returns, using the information on their Schedule K-1 provided by the S corporation.
Corporations are not eligible for the QBI deduction, because the corporation’s income is taxed separately from that of the owner. S corporations and partnerships file an information tax return, with no tax being paid by the business.
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,
- Capital gains or losses,
- Dividends and dividend equivalents,
- Non-business interest income, and
- Other situations.
See the Instructions for Form 8995 for a complete list of excluded income.
The QBI deduction may be limited by the wages or salary 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.
Specified Service Trades or Businesses (SSTBs)
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 certain 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.
The QBI Deduction on Your Tax Return
For years beginning in 2019, the QBI deduction is calculated on one of two forms:
Form 8995 is the simplified computation form. You can use this form if your taxable income is not greater than $160,700 for an individual, $160,725 if married filing separately or married nonresident alien, or $321,400 if married filing jointly. (These amounts are for 2019 tax returns; the limits change each year.)
Form 8995-A is for more complicated situations, including SSTBs and multiple businesses.
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 on one of the forms above. 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
- Section 199A - Qualified Business Income Deduction FAQ’s
- IRS Publication 535 - Business Expenses
- Facts about the Qualified Business Income Deduction
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 get help from a tax professional.