Qualified Business Income Deduction & Tax Reform

The qualified business income deduction (QBI) is a tax deduction that allows eligible self-employed and small-business owners to deduct up to 20% of their qualified business income on their taxes. Total taxable income refers to all what is a qualified business income deduction the taxpayer’s income before the QBI deduction is applied. This may include wages from other jobs, wages earned by your spouse (if married and filing a joint return), interest and dividends, capital gains, rental income, and more.

To claim the QBI deduction, the business must operate as a pass-through entity, have QBI, and survive the numerical calculations. Form 8995-A is for more complicated situations, including SSTBs and owners of multiple businesses. Specific types of income https://www.bookstime.com/ must be removed from the calculation for the QBI deduction. You can count most of your business’s net income from business operations. Keeper is the top-rated all-in-one business expense tracker, tax filing service, and personal accountant.

Qualified business income deduction: Keys to claiming this big tax break

Engineering and architecture were specifically excluded from the SSTB definition as it relates to this new deduction. Many or all of the products featured here are from our partners who compensate us. This influences which products we write about and where and how the product appears on a page. We believe everyone should be able to make financial decisions with confidence. And if you’re looking for simpler explanations of complicated tax topics, our Keeper tax assistants are here for you! There are also special circumstances with people who own multiple businesses.

• However, an SSTB that makes at or below the threshold amount can take the deduction up to 20%.
• For two scenarios in this regard, see the sidebar « Practitioner Responsibility Case Studies. »
• The deduction is taken for partnerships and S corporations at the partner or shareholder level.
• The deduction allows for a portion of this income to be exempt from taxation, thereby providing a financial advantage to qualifying entrepreneurs.
• Note that this is a vague definition, and the IRS states that a determination will be made based on « all of the facts and circumstances » of a person’s business.

The deduction allows eligible taxpayers to deduct up to 20 percent of their QBI, plus 20 percent of qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income. Income earned through a C corporation or by providing services as an employee is not eligible for the deduction. For more information on what qualifies as a trade or business, see Determining your qualified trades or businesses in the Instructions for Form 8995-A or Form 8995.

What is the Qualified Business Income Deduction?

The QBI deduction provides a generous tax break for businesses that qualify to claim it. However, as the rules and definitions above make clear, determining who can claim the QBI deduction and calculating it is no easy task. The client receives a refund of $100,000 related to an ERC claim for 2020. The practitioner knows that the client had only five employees during 2020, one of which was the owner’s daughter.