The Qualified Business Income (QBI) deduction is a tax break that allows eligible self-employed individuals and small-business owners to deduct up to 20% of their qualified business income on their taxes. This deduction applies to owners of sole proprietorships, partnerships, S corporations, and some trusts and estates. Below are the key points:
- Eligibility:
- Owners of sole proprietorships, partnerships, S corporations, and certain trusts and estates may qualify.
- Income earned through a C corporation or as an employee is not eligible for this deduction.
- The deduction is available regardless of whether taxpayers itemize deductions or take the standard deduction.
- Taxpayers can claim the deduction for tax years beginning after December 31, 2017, and ending on or before December 31, 2025.
- Components of the Deduction:
- QBI Component: Equals 20% of QBI from domestic businesses (sole proprietorships, partnerships, S corporations, trusts, or estates). Subject to limitations based on taxable income, type of trade/business, W-2 wages, and qualified property.
- REIT/PTP Component: Equals 20% of qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income. Not limited by W-2 wages or qualified property.
- What Is QBI?:
- QBI includes net income, gain, deduction, and loss from any qualified trade or business.
- It encompasses self-employment tax, self-employed health insurance, and contributions to qualified retirement plans.
- Excludes items not properly includable in taxable income, investment items (capital gains/losses), interest income not allocable to a trade/business, and non-U.S. business income.
Let’s walk through an example to illustrate how the Qualified Business Income (QBI) deduction works:
- Scenario:Business Income: Suppose you have a sole proprietorship, and your net business income (QBI) for the year is $80,000.
- Total Taxable Income: Consider all your income sources. Let’s say your total taxable income (including wages, interest, etc.) is $100,000.
- Threshold Check: Since your total taxable income is below the threshold ($182,100 for single filers), you qualify for the full 20% deduction.
- QBI Deduction Calculation:
- 20% of QBI = 0.20 × $80,000 = $16,000
- Final Deduction Amount:
- Your QBI deduction is $16,000.
Remember that this is a simplified example, and actual tax calculations can be more complex due to various factors (such as W-2 wages, type of business, and other deductions).