The qualified business income deduction was introduced after the 2018 tax year.
Due to the Tax Cuts and Jobs Act (TCJA), individuals who are owners of businesses may qualify for a business income deduction (QBI). Qualifying business can deduct up to 20% of their business income on their tax return.
This includes sole proprietors, partnerships, S corporations, trusts and estates. This is a deduction that you can only take for tax years 2018 and onward. It does not count towards prior years before 2018.
The deduction is limited to the lesser of the QBI component plus the REIT/PTP component or 20% of the taxpayer’s taxable income minus net capital gain.
Businesses that do not qualify
- C corporations
- Any trade or business whose principal asset is the reputation or skill of one or more of its employees or owners
- Services you performed as an employee of another person or business
The IRS states that the QBI does not include the following:
- Items that are not properly included in taxable income
- Investment items such as capital gains or losses or dividends
- Interest income not properly allocated to a trade or business
- Wage income
- Income that is not effectively connected with the conduct of business within the United States
- Commodities transactions or foreign currency gains or losses
- Certain dividends and payments in lieu of dividends
- Income, loss, or deductions from notional principal contracts
- Annuities, unless received in connection with the trade or business
- Amounts received as reasonable compensation from an S corporation
- Amounts received as guaranteed payments from a partnership
- Payments received by a partner for services other than in a capacity as a partner
- Qualified REIT dividends
- PTP income
How is it calculated?
The entirety of the QBI deduction is the lesser of either
- 20% of your business income, plus 20% of your qualified REIT dividends and qualified PTP income, OR
- 20% of your taxable income minus your net capital gain
However, if your taxable income goes over $157,500 for individual taxpayers and $315,000 for joint filers, you will be ineligible for this deduction.
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