Qualified Business Income Deduction: What is QBI Deduction and How to Calculate it?{2024}

Updated on April 6, 2024

Understanding the QBI Deduction: Definition and Calculation

Qualified Business Income Deduction

The QBI Deduction lets you deduct up to 20% of your Qualified Business Income (QBI). Not available for income from C Corporations or services as an employee. Whether you take the standard or itemized deduction, you can still claim QBI Deduction. Eligible taxpayers can claim it for tax years from December 31, 2017, to December 31, 2025.

What is QBI Deduction?

The QBI deduction allows you to deduct up to 20% of your Qualified Business Income, 20% of qualified PTP income, and qualified REIT dividends. Each year, the maximum threshold amounts and phase-in range amounts linked to QBI deductions may be adjusted based on the inflation rate.

If you’re eligible and have QBI, you can figure out your deductions using Form 8995. But, you need to meet the taxable income threshold for the relevant year. The Qualified Business Income Deduction has two key components:

  1. QBI Part: Businesses (trusts, S corporations, estates, partnerships, or sole proprietorships) can deduct up to 20% of their QBI. The deduction factors in taxable income, business type, W-2 wages, and the property’s UBIA.
  2. PTP/REIT Part: This allows a 20% deduction for qualified PTP earnings and REIT dividends. Unlike the QBI part, it’s not tied to W-2 wages. Qualified PTP income may be limited based on taxable income. UBIA of qualified property includes depreciable assets related to the business.
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For the PTP/REIT part, it covers REIT dividends (e.g., from RIC) and PTP income (per section 199A). If a PTP in an SSTB exceeds the income threshold, PTP income might be restricted. Importantly, a net loss in the QBI part doesn’t impact the PTP/REIT part calculation.

What is a QBI?

QBI encompasses all the nitty-gritty of qualified gain, deductions, income, or losses from your business endeavors. That includes the deductible portion of the SEHI, deductions for contributions to eligible retirement plans, and the SE tax. It’s basically the whole financial shebang from your trade or business.

QBI doesn’t cover:

  • Wage income
  • Investment items
  • PTP income
  • Items not properly included in taxable income
  • Qualified REIT dividends
  • Annuities
  • Commodities transactions

And there are more exclusions listed on the IRS website. Remember, the deduction is capped at 20%, regardless of eligibility. For a deep dive into what qualifies as QBI, how to crunch the deduction numbers, threshold amounts, forms, and the latest updates, head over to the official IRS website. The instruction sections of Form 8995 and Form 8995-A are also handy for mastering the ins and outs of QBI Deductions.

Who is Eligible to Claim a QBI Deduction?

Business owners, whether running S corporations, trusts, sole proprietorships, partnerships, or LLCs, can snag some perks with the QBI Deduction, often known as the Section 199A deduction. This sweet deal brings significant advantages for eligible folks.

Now, for the scoop in 2023:

If you’ve got REIT Dividends, QBI, or PTP income or loss in the mix, and your taxable income sits at $182,100 or less (for individuals like trusts, estates, singles, heads of households, or surviving spouses), or $364,200 or less (for those married and filing jointly), you’re in the QBI Deduction game. These income limits are pre-QBI Deductions, just to keep things crystal clear.

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How to Calculate it?

When you’re aiming to claim those QBI Deductions, get cozy with Form 8995. But, don’t forget to check that it’s all spick and span for the tax year you’re diving into. The IRS likes to spruce up forms and instructions annually, so make sure you’ve got the latest scoop for your deductions to be on point.

Here’s the deal with the deduction: it’s either 20% of your taxable income minus net capital gain, or it’s the smaller of the QBI part plus the PTP/REIT part.

And if you’re digging into Form 8995, you’ll find the lowdown on every nitty-gritty detail of the QBI deduction. They even throw in a handy flow chart to help you figure out which items get the green light for inclusion in your QBI. It’s like your deduction roadmap in one neat package.

 

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