Qualified Business Income Deduction: What It Is, How To Claim It

A married filing jointly taxpayer in 2025 has a taxable income threshold of $394,600, with a phase-out range up to $494,600. Since John’s taxable income is $400,000, it falls within this range, so he’d have to apply additional limitations. When taxable income exceeds the threshold, the calculation becomes more complex due to the wage and property test. For the wage and property limitations, you’ll calculate these separately for each business above the income thresholds. However, you can aggregate certain businesses if they meet specific requirements, such as being commonly controlled and providing products or services that are the same or customarily offered together.

Who’s eligible for the QBI deduction?

The QBI deduction, created under the Tax Cuts and Jobs Act (TCJA), lets eligible business owners deduct up to 20% of their qualified business income. This deduction is also called the 199A deduction, as it is addressed in Section 199A of the TCJA. As mentioned above, the QBI deduction is available to sole proprietorships, partnerships, S corporations, trusts, and estates.

• The Qualified Business Income Deduction, also known as the Section 199A deduction, allows owners of pass-through entities to deduct up to 20% of their qualified business income.
• Since your QBI is less than your taxable income minus your gains, you’d apply the 20% to the $20,000 QBI, resulting in a $4,000 deduction.
• Calculating your QBI deduction is complex, but a rule of thumb is that it must be directly attributable to your trade or business that’s being conducted in the United States.
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The income limits for this tax break in the 2024 tax year are $191,950 or less for single filers and $383,900 or less for individuals filing jointly. These figures are slightly higher than the limits for the 2023 tax year, which included 182,100 or less for single filers and $364,200 or less for joint filers. However, it’s important to note that the IRS excludes certain types of income from a QBI calculation because they don’t meet the eligibility criteria provided in the tax code. These include profits from investment items such as capital gains or losses, annuities, guaranteed payments from a partnership, and income, loss or deductions from notional principal contracts. Additionally, any income linked to business operations outside the U.S. does not qualify for QBI deduction. Service-based businesses, such as consulting firms, law practices, and medical offices, can also generate QBI but may face restrictions.

What Is the Qualified Business Income Deduction (QBI) & Who Qualifies?

Your business or trade may also be considered an SSTB if you trade or deal in certain assets or if the primary asset of your business is the reputation or skill of one or more employees. When you file business taxes, you may be eligible to deduct a portion of your income to save money, but you’ll need to determine if you qualify for the QBI deduction first. While it might be tempting to handle your tax matters personally, it’s recommended to consult with a tax specialist, especially if you want to maximize eligible deductions like QBI. Experts like tax preparers can help you formulate tax planning strategies to minimize your overall liabilities while ensuring compliance with federal, state or local tax provisions. Following the basic steps of how to calculate QBI, Nelly will multiply the $120,000 by 20% to get an eligible deduction of $24,000.

Small Business Guide to New Tax Law

To qualify for the QBI Deduction, business owners must meet certain criteria, which primarily involve the type of business and the total taxable income. Understanding these qualification benchmarks is crucial for maximizing the benefits of this tax deduction. At its core, the Qualified Business Income (QBI) Deduction is a tax break introduced as part of the Tax Cuts and Jobs Act, aimed at providing small business owners with a valuable reduction in their taxable income. Essentially, the QBI Deduction allows eligible business owners to deduct up to 20% of their qualified business income, leading to a potentially lower tax liability. The QBI Deduction is available to pass-through entities such as S corporations, partnerships, and LLCs taxed as partnerships. These how to get a qualified business income deduction businesses do not pay corporate income tax; instead, their income is passed to the owners, who report it on personal tax returns.

The UBIA used to calculate the partner’s QBI deduction must be calculated by the individual or entity that directly conducts the qualified business. A specified service trade or business (SSTB) is any trade or business where the main asset is the skill or reputation of at least one employee or owner. The lower threshold is what you need to stay below to get the full 20% deduction.

What to Do if You Owe Back Taxes

For a full list of what the IRS doesn’t consider qualified business income, head here. Jacob Dayan is the CEO and co-founder of Community Tax LLC, a leading tax resolution company known for its exceptional customer service and industry recognition. Since 2010, he has led Community Tax, assembling a team of skilled attorneys, CPAs, and enrolled agents to assist individuals and businesses with tax resolution, preparation, bookkeeping, and accounting. A licensed attorney in Illinois and Magna Cum Laude graduate of Mitchell Hamline School of Law, Jacob is dedicated to helping clients navigate complex financial and legal challenges.

• Let’s stick with the same example as an S Corp that has $900k of profit and $100k of wages.
• Use the worksheet in the Form 1040 instructions if your taxable income before the QBI deduction isn’t more than $200,000 ($400,000 if married filing jointly).
• Small business owners and self-employed individuals can calculate QBI deduction by multiplying their qualified business income by 20%.

Those with qualified dividends from a real estate investment trust (REIT) or income from a publicly traded partnership (PTP) can also claim a 20% QBI deduction. The Qualified Business Income (QBI) deduction, also known as Section 199A, was introduced by the Tax Cuts and Jobs Act (TCJA) of 2017. It allows eligible taxpayers to deduct up to 20% of their QBI, plus 20% of qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income. The deduction is available for tax years beginning after December 31, 2017, and ending on or before December 31, 2025. The standard deduction and the QBI deduction are not mutually exclusive, meaning taxpayers can claim both deductions if eligible. However, the amount of the QBI deduction may be limited for taxpayers who have a high taxable income.

What is the purpose of the QBI deduction?

While various types of business income are eligible for the QBI deduction, certain types aren’t. Wage income, income that’s not included in taxable income, capital gains and losses, and certain other types of income are excluded. The QBI deduction also excludes income generated by foreign currency gains, commodities transactions, and certain dividends. As implied in Nelly’s case, a taxpayer’s overall taxable income can pose certain limitations for a Section 199A deduction.

Adjustments for deductions are essential for accurate QBI calculations and compliance with tax regulations. These adjustments can influence the final QBI figure and the deduction amount a business owner may claim. Accurately calculating QBI involves identifying eligible businesses, recognizing excluded income sources, adjusting for deductions, and following specific calculation steps. When one business generates a loss while others show profits, the loss reduces your total QBI before applying any limitations. This can significantly impact your final deduction amount, making careful planning across all your business activities important for maximizing the benefit. The deduction also can’t exceed 20% of your taxable income minus net capital gains.