Qualified Business Income Deduction (QBI)

The qualified business income deduction (QBI) is a tax deduction that allows small businesses to deduct up to 20% of their business income on their tax return. Taxpayers can begin to claim this deduction on their 2018 taxes to December 31, 2025. However, the income must be qualified business income.

Qualified Business Income is the net amount of qualified items of income, gain, deduction and loss from any qualified trade or business. Only items included in taxable income are counted. In addition, the items must be effectively connected with a U.S. trade or business.

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.

Eligibility

A business operated as a sole proprietorship, partnership, S-corporation, trust or estate are eligible. C-corporations are not eligible for this deduction. There are limitations depending on the type of business, the amount of wages (W-2) paid, and unadjusted basis of qualified property held by the business.

If your taxable income goes over $157,500 for individual taxpayers and $315,000 for joint filers, you will be ineligible for this deduction.

The IRS emphasizes that the QBI does not include the following items:

• Capital gains or losses or dividends
• Interest income not properly allocable to a trade or business
• W-2 Income
• Foreign currency gains or losses/Commodities transactions
• Certain dividends and payments
• 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

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This entry was posted on Monday, November 16th, 2020 at 9:08 pm and is filed under Deductions. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.