QBI Guide: How to Calculate a Qualified Business Income Deduction

A qualified business income deduction is a tax deduction that small business owners and self-employed individuals can claim on their annual income tax returns. The QBI deduction allows eligible individuals to deduct up to 20 percent of business-related taxable income. There are different income thresholds for single-filers and joint-filers who want to claim QBI deductions, but those who are below the threshold typically take the standard 20 percent deduction.

A person doesn’t need to itemize your expenses or deposits to claim this deduction. Taxpayers who earn over certain income are required to calculate a qualified property limitation based on W-2 wages and property. Taxpayers who earn income from specified service trades or businesses (SSTBs)—which include people in industries like health, law, accounting, and trading—may not be eligible for the deduction.

Qualified business income refers to the net profit of your business. More specifically, QBI is the net amount of qualified income, gains, deductions, and losses for a business. QBI does not include investments, qualified REIT dividends, or qualified publicly traded partnerships (PTP) income. Qualified business income also does not include net capital gains or losses, interest income, payments to shareholders or partners, or any income that is earned outside of the United States.

Here is an overview of who can qualify for QBI deductions.

• People with pass-through income: People who qualify for a QBI deduction must have "pass-through income” which is income from a business that they report on their personal tax returns. These entities include sole proprietorships, self-employed individuals, partnerships, limited liability companies (LLCs), and S corporations. C corporations are not eligible for the QBI deduction.
• Business owners who meet the income requirements: If a business files for a QBI deduction with income from any of these eligible business types, the representative must also meet income requirements depending on their filing status. For single tax return filers, a person’s total taxable income must be at or below $164,900. For married couples who file their taxes jointly, their total taxable income must be at or below $329,800. If a person’s income is above these limits, the IRS requires them to apply the qualified property limitation using their businesses’ total W-2 wages and the total value of the qualified property.
• Certain filers in SSTBs are allowed to claim QBI: For filers in a "specified service trade or business," such as doctors, lawyers, actors, and financial planners, the income threshold is higher to claim QBI. People who file as single must make $213,300 a year or below, and joint-filers must make $426,600 or below. People who earn above these amounts will not qualify for the tax deduction and cannot apply for the qualified property limitation.

Before a person files for a QBI deduction, they should make sure that their income is related to a QBI-qualified trade or business. Here is an overview of some of the types of businesses that may be eligible for QBI deductions.

• Qualified trade businesses: Regardless of the amount of income they make, people who are responsible for qualified-trade businesses may be eligible for QBI deductions on their tax returns. These businesses are classified as profit-driven businesses and include industries like real estate and other real property trades, resource companies (such as electrical energy, gas, or steam services), and farming or horticultural businesses.
• Sole proprietorships: People who are the sole proprietors of their businesses may be eligible to claim a QBI business deduction on their income tax returns if their yearly taxable income falls within the legal threshold.
• Partnerships: Rather than a sole proprietorship, a partnership is when two or more parties own a business and are responsible for its profits and liabilities. If a person’s individual income from a partnership falls within the tax-approved threshold, they may be eligible for a QBI deduction.
• LLCs: Limited liability companies are taxed slightly differently than partnerships or sole proprietorships. They are protected from personal liability for business losses that other businesses may not be. At the same time, income that is earned from an LLC and is of a qualified business may be eligible for QBI deductions.
• S Corporations: An S corporation is a tax subchapter status in the US internal revenue code that allows for eligible companies—usually small businesses—to pass business income taxes along to their shareholders. People who own these corporations may be eligible for QBI deductions if they meet the income requirements.
• SSTBS (on occasion): If your business is considered a specified service trade or business (SSTB) and your income is within the legal threshold, you may be eligible for the deduction. SSTB fields include performing arts, health, law, accounting, consulting, investment, and athletics.

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