Eligibility for the Qualified Business Income Deduction – What is that & How It Works

Qualified Business Income Deduction

If you are running a business or are self-employed, then you may be eligible for a deduction. Business owners can reduce their tax liabilities by comprehending and utilizing all of the available tax deductions and credits. By virtue of the nature of your firm and your business revenue, you automatically get eligible for the qualified business income tax deduction.

So, before exploring the QBI in detail, let’s first understand what is a qualified business income deduction.

What is Qualified Business Income Deduction?

The 2017 Tax Cuts and Jobs Act (TCJA), which established this deduction, also known as the Section 199A deduction, went into effect in 2018. Therefore, pass-through business owners who meet the requirements can deduct up to 20% of their net income from taxes.

Regardless of whether you choose to take the standard deduction or to itemize your personal deductions, you are still eligible to claim the QBI deduction. For owners who are considered as self-employed individuals, the QBI deduction has no effect on business income and has no bearing whatsoever on self-employment tax.

Only qualifying business owners who qualify for the QBI deduction have their federal income taxes reduced. It does not lower the amount of self-employment tax, net investment income tax, or Social Security or Medicare liabilities.

What Includes Qualified Business Income Deduction?

Precisely qualified business income (QBI) is your portion of the company’s profits. It is actually the net amount of earnings, gains, losses, and deductions from your company.

Here are the key elements of profit and loss to arrive at QBI.

  • Remuneration provided to an S corporation owner-employee,
  • Also, guaranteed contributions to partners.
  • Payments received by partners from outstanding parties.
  • Businesses should also consider investments.
  • Also, the business can take into interest amounts piling on outstanding receivables.

Moreover, you can also utilize the income which you have not mentioned in the business returns for the deduction.

  • Profits mentioned on Form 4797, such as gains from the sale of commercial real estate.
  • The deduction for half of the self-employment tax.
  • The deduction for individual health insurance.
  • You can also include a deduction for contributions to a qualified retirement plan.

However, you cannot include the following things.

  • Qualified REIT dividends.
  • PTP income.
  • Salary income
  • Revenue that is insufficiently related to the conduct of business within the United States.
  • Transactions involving goods or profits or losses in foreign currencies.
  • Specific earnings and payments made in lieu of dividends.
  • Interest income that is not appropriately attributable to a trade or business.
  • Sums received as reasonable compensation from an S corporation.
  • Amounts received as guaranteed payments from a partnership.

Who Are Eligible for IRS Qualified Business Income Deduction?

The qualifying business income deduction is only available to taxpayers with “pass-through income,” which is defined as business revenue that is reported on a personal tax return.

  • S corporations.
  • Limited Liability Companies.
  • Partnerships.
  • Sole Proprietorships.

However, C corporations cannot use the QBI deduction since they are required to pay corporate income taxes, unlike pass-through businesses.

How to Calculate QBI Tax Deduction?

The 20% QBI deduction, also referred to as the Section 199A deduction, is figured as the lesser of the following amounts:

  • 20% of the taxpayer’s taxable income less net capital gains.
  • 20% of the taxpayer’s qualified business income, plus 20% of qualified real estate investment trust dividends and qualified publicly traded partnership income, if applicable.

There are two basic income thresholds to take into account with regard to the QBI deduction.

Lower QBI Threshold

To receive the entire 20% deduction, you must stay below the lower threshold. Every year, this upper-income cap is adjusted for inflation. It is as follows for the 2022 tax year:

  • $170,050 for a single filer
  • $340,100 if filed jointly

The thresholds increase to $182,100 for individuals and $364,200 for joint filers in 2023.

Your QBI deduction will begin to “phase out” or become only partially deductible after you reach these restrictions.

Upper QBI Threshold

These are the income restrictions for 2022:

  • For a single filer, $220,050.
  • For a joint filer, $440,100.

If you reach such amounts, your deduction will often be capped at the greater of:

  • 25% of the W-2 earnings plus 2.5% of the eligible depreciable property.
  • 50% of the W-2 wages paid by your company.

How to Claim Qualified Business Income Deduction?

Let’s go over the quick steps involved in requesting the QBI deduction.

Determine Your Taxable Income

Your total income minus any allowable deductions are your taxable income. You should keep cost records throughout the year. It will help you to reduce your taxable income.

In case your bookkeeping isn’t up to the mark, you can Hire qualified bookkeepers from The Bookify.

Fill the Form 8995 or Form 8995-A

You can apply for your QBI deduction using either Form 8995 or Form 8995-A.

Fill out Form 8995 if you are:

  • A single filer who, before QBI deductions, has a taxable income of $170,050 or less.
  • A joint taxpayer has a taxable income that is $340,100 or less before QBI deductions.

Fill out Form 8995-A if you are:

  • A single filer with taxable income above $170,050 before QBI deductions.
  • A joint taxpayer who, before QBI deductions, has taxable income that is more than $340,100.

And once you’ve completed filling out the appropriate form, be sure to attach it with your tax return when you send it to the IRS.

How QBI works if You Own Multiple Businesses?

If you own more than one, calculate the QBI deduction for each of your businesses and then add the results. It may provide you with a bigger QBI deduction in some cases.

You might be able to “aggregate” the various components of the deduction — QBI, W-2 salaries, and UBIA.

The capacity to combine firms is governed by complex rules that take ownership interests and other aspects into account. But there is one unambiguous rule: You cannot combine specified service trades or businesses (SSTB).

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Frequently Asked Questions

How is self-employment tax affected by the qualifying business income deduction?

There is no impact on self-employment tax because the QBI deduction is personal, not company.

To whom does QBI apply?

Those who own sole proprietorships, single-member LLCs, partnerships, S corporations, and certain trusts are eligible to take advantage of the QBI deduction.

What is the 2022 maximum allowable deduction for qualified company income taxes?

Up to 20% of the QBI of taxpayers is deductible. If taxable income for a single taxpayer exceeds $170,050 or a married couple filing exceeds $340,100, they can go for a QBI deduction.

Are you eligible to deduct business income from your rental property?

If owners satisfy certain standards to be deemed a “trade or business,” then real estate rental properties may qualify for the qualified business income (QBI) deduction.

Author Details
CPA , The Bookify
I am a Certified CPA with over 20 years in the field of accounting, and I write about how to save time on your taxes and get the most out of your investments.

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