What is a Qualified Business Income Deduction?
Section 199A of the Internal Revenue Code (“IRC”) provides business owners an income deduction when reporting their qualified trade or business’ income, also known as a qualified business income (“QBI”).
The following trade or business income’s that qualify for this deduction are any incomes reported under “Schedule C” sole proprietorships, business and rentals, “K-1” S corporations, partnerships, trusts or estates, “Schedule E” real estate investors, and “Schedule F” farmers and ranchers.
The QBI component of the deduction equals 20% of QBI from a domestic business operated as a sole proprietorship or through a partnership, S corporation, trust or estate. Depending on the taxpayer’s taxable income, the QBI component is subject to multiple limitations that vary with the type of trade or business.
How Do I Calculate My Qualified Business Income Deduction?
A taxpayer is never going to be able to take a deduction greater than 20% of QBI. This deduction will be less than 20% of QBI if the taxpayer is single and makes more than $157,500 or is married, filed jointly, and makes more than $315,000 and entering the upper threshold of $415,000. Taxpayers may need to further reduce their deduction by an overall limitation.
If a taxpayer has more than one pass-through entity with QBI, these amounts must be combined. A taxpayer determines the combined QBID by adding together the allowed QBID amount for each respective entity. If there is only one pass-through entity, then the QBID for the one entity is the combined QBID.