Qualified Business Income Deduction: A Tax Break You’ve Been Missing
In 2018, The US Treasury Inspector General determined that there were 900,000 tax returns that qualified for and could have benefited from the qualified business income (QBI) deduction, but didn’t claim it. That’s a lot of taxpayers who didn’t get a deduction that they deserve. You might have been one of them.
In this post, we’ll go over the basics of the QBI deduction, determine if you qualify, and other facts about this little-known business deduction.
The QBI deduction is a business income deduction applied to owners of pass-through entities such as LLCs and S-Corps. Below we will detail how the 20% pass through deduction works and share information that will help you determine if you qualify.
What is the qualified business income deduction?
The qualified business income deduction is a deduction allowed to pass-through entities, such as LLCs and S-Corps, that enables business owners to deduct up to 20% of their qualified business income.
You report this using the IRS form 8995. If your income is above $160,700, then you will need to report this via the Form 8995-A, using the attached schedules.
What is the “QBI phase out”?
The “QBI phase out” is a gradual reduction of the deduction that occurs as income increases from $160,700 and $207,500. Personal income of $207,500 or higher is ineligible to qualify for QBI. You can find more information here.
The qualified business income deduction
The QBI deduction can be somewhat complicated to calculate. Many factors limit qualified business deduction income claims. We recommend discussing your QBI claim with a tax professional to take full advantage of the deduction and avoid any legal mishaps.
You can claim the QBI no matter whether you itemize your deductions or take the standard deduction. The QBI deduction does not affect business income or the self-employment tax, as it is a personal deduction.
What is considered “qualified business income?”
QBI is your share of the profits from a business, adjusted for various qualifying factors. Here are a few examples of these factors and forms of QBI:
- QBI does include your share of Income from a qualified trade or business, be it from an enterprise you own wholly or as a partner. This does not include the compensation you receive as an employee of your company.
- QBI does not include investments such as capital gains and losses or dividends.
- QBI does not include interest income that is not business interest.
- Interest on a bank account does not count as QBI. However, interest in the accounts receivable does.
Who can claim the QBI deduction?
This is a personal tax deduction. As noted above, you would file form 8995 or 8995 A, and attach the appropriate schedules as part of your tax return: schedules C (profit and loss), Schedule E (supplemental profit and loss), Schedule K-1 (partner or shareholder’s share of income, deductions, and credits), or form 1099-DIV (dividends and distributions).
How to calculate the qualified business deduction
Once you and your tax professional determine what qualifies for QBI, the calculation is simple. For example, if your taxable income is $120,000 and your QBI is $40,000, you simply multiply your QBI by 20%. In this case, the pass through deduction would be $8,000.
It’s important to note that if you own interest in multiple businesses, you need to net together with the QBI amounts for all your businesses and report them correctly.
Further, your QBI deduction can not be higher than 20% of your taxable income without the deduction.
Qualified business income FAQs and need-to-know info
QBI can be confusing. In addition to consulting with your tax professional, we’ve gathered a few resources and FAQs to help you navigate the QBI and get the tax deduction you deserve.
- This page at the IRS goes into exhaustive detail on the QBI and how to qualify for it: Facts about the qualified business deduction.
- Here is an extensive FAQ by the IRS on the QBI: Tax Cuts and Jobs Act, Provision 11011 Section 199A – Qualified Business Income Deduction FAQs.
- For “On the books” information at the Federal Register about the QBI, including federal qualification rules, look here: Qualified Business Income Deduction.
- Intuit has a stellar drop down qualified business income deduction calculator that can help you see if you qualify for the QBI deduction: 20% Pass Through Deduction Calculator.
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