Are you aware of a tax deduction that you may be entitled to and it does not cost you anything? You don’t need to do much, you just get this special tax break, which we called as the qualified business income deduction (QBI deduction) just by qualifying for it. So, as a business person, you can lower down your taxable income just by adopting qualified business income deduction (QBI deduction) or for qualifying for it.
What is a Qualified Business Income Deduction?
The qualified business income deduction, which is also known as QBI is referred to a personal deduction which is limited to the owners of pass-through entities or to self-employed and small-business owners, where they can subtract up to 20 percent of their qualified business income on their taxes.
Note: Here the term, pass-through business or trade refers to the persons or individuals or the business who do not file taxes, the owners do. It mainly involves the following:
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- Sole proprietorship s.
- Partnerships.
- S corporations.
- Limited liability companies (LLCs).
What is section 199 A?
The qualified business income (QBI) deduction is also recognized as Section 199 A, where the owners of pass-through businesses are eligible to claim a tax deduction priced up to 20 percent of their competent business income. Section 199 A was announced as part of the 2017 Tax Cuts and Jobs Act.
What is QBI?
QBI stands for qualified business income covered under Section 199 A of Tax Cuts and Jobs Act 2017.
What is a qualified business income?
The qualified business income is the taxable income that is derived from the domestic business. In case, the business is having international income then only the domestic income is taken into consideration.
What is not included in Qualified business income?
The Qualified business income does not include the following things as:
- Salaries or wages of Employee
- Nontaxable income, like municipal bond interest
- Capital gains or losses
- Foreign currency gains or losses
- Most investment dividends
- Qualified REIT (real estate investment trust) dividends
- Publicly traded partnership (PTP) income
- Interest income
- Income, loss, or deductions from a notional principal contract (NPC)
- Annuities that weren’t received as part of conducting business
What is the amount of QBI deduction?
Although, the precise amount of QBI deduction depends on the value of your income.
Whereas, the complete QBI deduction or pass-through business deduction is priced as the lesser of the following as:
- 20 percent of your qualified business income, in addition to 20 percent of your qualified REIT dividends as well as your qualified PTP income, OR
- Subtracting net capital gain from 20 percent of your taxable income
In case your taxable income is equal to or more than the threshold limit, than there exist some limitations to the maximum possible deduction.
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Here, you can also use qualified business income deduction worksheets, which is given in the instructions of qualified business income form or Form 8995-A in order to calculate your exact amount of deduction.
Your filing status determines your threshold limit. So, let us now study the thresholds for QBI deduction income.
Thresholds for 2019 QBI deduction income:
| Filing status of Person | Income threshold (the limit for the full deduction) | The income limit for a partial deduction |
| Single | $ 160,700 | $ 210,700 |
| Head of household | $ 160,700 | $ 210,700 |
| Married filing jointly | $ 321,400 | $ 421,400 |
| Married filing separately | $ 160,725 | $ 210,725 |
| Married nonresident alien | $ 160,725 | $ 210,725 |
The above table represents how qualified business income deduction works.
So, if your total taxable income for the year 2019 come under $ 160,700 in case of single filers or your total taxable income for the year 2019 come under $ 321,400 700 in case of joint filers, and similarly if your total taxable income for the year 2019 come under $ 160,725 in case of Married non-resident alien then you qualify for the deduction. But, in case of crossing the threshold limit, complicated qualified business income IRS rules determine whether you will get QBI deduction or not.
How to calculate qualified business income deduction?
Step 1: First you need to know whether your business is a specified service business or not. As there exist different types of businesses that qualify as an SSTB i.e. specified service trade or business. And the specified service trade or business income do not qualify for the purpose of qualified business income deduction.
Note: Here the SSTB refers to any business or trade which perform its amenities in one of the following fields such as:
- Accounting
- Actuarial science
- Athletics
- Brokerage services
- Consulting
- Financial services
- Health services, such as performed by doctors and nurses
- Investing and investment management
- Law, including lawyers
- Performing arts
- Trading
Step 2: You need to Calculate your total taxable income for the specific or particular year. And in case your total taxable income is less than $ 157,500 or $ 315,000 if married and filing jointly then full 20 percent QBI deduction can be claimed up.
Step 3: This involves two cases:
- If the business is an SSTB, and
- If the business is not an SSTB
- Business is an SSTB: In case your business is an SSTB and your over-all taxable income is $ 207,500 or further or $ 415,000 or more if married and filing jointly then this amount of $ 207,500 or further or $ 415,000 or more is too high to be claimed as a qualified business income deduction.
- Business is not an SSTB: In case your business is not an SSTB and your over-all taxable income lies somewhere between $ 157,500 and $ 207,500 or $ 315,000 and $ 415,000 if married and filing jointly then full 20 percent QBI deduction can be claimed up.
Note: Step 4 is followed only when your business is an SSTB and your over-all taxable income lies somewhere between $ 157,500 and $ 207,500 or $ 315,000 and $ 415,000 if married and filing jointly.
- Step 4: You need to take up 20 percent of your qualified business income and apply the following limit as:
50 percent of your share of W-2 wages paid by the business, or - 25 percent of individuals wages, added to 2.5 percent of your share of qualified property
Step 5: Then you need to compare the qualified business income deduction calculations to 20 percent of your QBI and then deduct the smaller amount.
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Qualified business income deduction calculator:
In order to calculate qualified business income deduction, you can also use qualified business income deduction calculator
Qualified business income deduction examples:
Example 1: In case of a single individual: XYZ has a Taxable Income of $ 100000 and his Qualified Business Income (QBI) is $ 204000 and XYZ has a Specified Service business then What will be the XYZ, QBI deduction or 199 A deduction?
Solution: Given to us the following as:
- Taxable Income = $ 100000
- Qualified Business Income (QBI) = $ 204000
- Has a Specified Service business
Calculation in case of Phaseout Range:
Lesser of the following:
| 20 percent of QBI | $ 40,800 |
| 20 percent of *Defined Taxable Income | $ 20,000 |
| Deduction Limit | $ 20,000 |
Note: Here, the Defined Taxable refers to Taxable Income – Net Capital Gains
The calculation for Non-Service Business in case of Phaseout Range:
| 20 percent of QBI | $ 40,800 |
| Greater of Wage and Asset | |
| (-) OR Difference Between QBI and Greater of Wages/Assets | $ 40,800 |
| Reduction to QBI | $ 0 |
Calculation for Non-Service Business in case of Above Phaseout Range:
| 20 percent of QBI (or Defined Taxable Income if lower) | $ 20,000 |
| 50 percent of Wages | $ 0 |
| 25 percent of Wages | $ 0 |
| 2.5 percent of Assets | $ 0 |
| Greater of 50 percent Wages vs. 25 percent Wages & Assets | $ 0 |
| Lesser of QBI (or Defined Taxable Income) and Wage/Asset | $ 0 |
Calculation for Specified Service Business in case of within Phaseout Range:
| 20 percent of QBI (multiplied by applicable percentage) | |
| Superior of Wage and Asset (multiplied by applicable percentage) | |
| Difference Between QBI and Greater of Wages/Assets | $ 0 |
| Reduction to QBI | $ 0 |
| Phaseout Deduction | $ 20,000 |
So, the QBI deduction or 199 A Deduction is $ 20,000.
Example 2: In case of a single individual: XYZ has a Taxable Income of $ 100000 and his Qualified Business Income (QBI) is $ 204000 and XYZ has a Specified Service business paying wages of $ 2000 and the Qualified Property in Business is $ 500 then What will be the XYZ, QBI deduction or 199 A deduction?
Solution: Given to us the following as:
- Taxable Income = $ 100000
- Qualified Business Income (QBI) = $ 204000
- Paying wages = $ 2000
- Qualified Property in Business = $ 500
- Has a Specified Service business
Calculation in case of Phaseout Range:
Lesser of the following:
| 20 percent of QBI | $ 40,800 |
| 20 percent of *Defined Taxable Income | $ 20,000 |
| Deduction Limit | $ 20,000 |
Note: Here, the Defined Taxable refers to Taxable Income – Net Capital Gains
The calculation for Non-Service Business in case of Phaseout Range:
| 20 percent of QBI | $ 40,800 |
| Greater of Wage and Asset | $ 1,000 |
| (-) OR Difference Between QBI and Greater of Wages/Assets | $ 39,800 |
| Reduction to QBI | $ 0 |
| Phaseout Deduction | $ 20,000 |
Calculation for Non-Service Business in case of Above Phaseout Range:
| 20 percent of QBI (or Defined Taxable Income if lower) | $ 20,000 |
| 50 percent of Wages | $ 1,000 |
| 25 percent of Wages | $ 500 |
| 2.5 percent of Assets | $ 13 |
| Greater of 50 percent Wages vs. 25 percent Wages & Assets | $ 1,000 |
| Lesser of QBI (or Defined Taxable Income) and Wage/Asset | $ 1,000 |
Calculation for Specified Service Business in case of within Phaseout Range:
| 20 per cent of QBI (multiplied by applicable percentage) | |
| Superior of Wage and Asset (multiplied by applicable percentage) | |
| Difference Between QBI and Greater of Wages/Assets | $ 0 |
| Reduction to QBI | $ 0 |
| Phaseout Deduction | $ 20,000 |
So, the QBI deduction or 199 A Deduction is $ 20,000.
Example 3: In case of Married: ABC has a Taxable Income of $ 160000 and his Qualified Business Income (QBI) is $ 500000 and XYZ has a Specified Service business then What will be the XYZ, QBI deduction or 199 A deduction?
Solution: Given to us the following as:
- Taxable Income = $ 160000
- Qualified Business Income (QBI) = $ 5,00,000
- Has a Specified Service business
Calculation in case of Phaseout Range:
Lesser of the following:
| 20 percent of QBI | $ 100,000 |
| 20 percent of *Defined Taxable Income | $ 32,000 |
| Deduction Limit | $ 32,000 |
Note: Here, the Defined Taxable refers to Taxable Income – Net Capital Gains
The calculation for Non-Service Business in case of Phaseout Range:
| 20 percent of QBI | $ 100,000 |
| Greater of Wage and Asset | $ 0 |
| (-) OR Difference Between QBI and Greater of Wages/Assets | $ 100,000 |
| Reduction to QBI | $ 0 |
| Phaseout Deduction | $ 32,000 |
The calculation for Non-Service Business in case of Above Phaseout Range:
| 20 percent of QBI (or Defined Taxable Income if lower) | $ 32,000 |
| 50 percent of Wages | $ 0 |
| 25 percent of Wages | $ 0 |
| 2.5 percent of Assets | $ 0 |
| Greater of 50 percent Wages vs. 25 percent Wages & Assets | $ 0 |
| Lesser of QBI (or Defined Taxable Income) and Wage/Asset | $ 0 |
The calculation for Specified Service Business in case of within Phaseout Range:
| 20 percent of QBI (multiplied by applicable percentage) | |
| Superior of Wage and Asset (multiplied by applicable percentage) | |
| Difference Between QBI and Greater of Wages/Assets | $ 0 |
| Reduction to QBI | $ 0 |
| Phaseout Deduction | $ 32,000 |
So, the QBI deduction or 199 A Deduction is $ 32,000.
Example 4: In case of Married: ABC has a Taxable Income of $ 160000 and his Qualified Business Income (QBI) is $ 500000 and XYZ has a Specified Service business paying wages of $ 5000 and the Qualified Property in Business is $ 1000 then What will be the XYZ, QBI deduction or 199 A deduction?
Solution: Given to us the following as:
- Taxable Income = $ 1,60,000
- Qualified Business Income (QBI) = $ 5,00,000
- paying wages = $ 5000
- Qualified Property in Business = $ 1000
- Has a Specified Service business
Calculation in case of Phaseout Range:
Lesser of the following:
| 20 percent of QBI | $ 100,000 |
| 20 percent of *Defined Taxable Income | $ 32,000 |
| Deduction Limit | $ 32,000 |
Note: Here, the Defined Taxable refers to Taxable Income – Net Capital Gains
The calculation for Non-Service Business in case of Phaseout Range:
| 20 percent of QBI | $ 100,000 |
| Greater of Wage and Asset | $ 2,500 |
| (-) OR Difference Between QBI and Greater of Wages/Assets | $ 97,500 |
| Reduction to QBI | $ 0 |
| Phaseout Deduction | $ 32,000 |
Calculation for Non-Service Business in case of Above Phaseout Range:
| 20 percent of QBI (or Defined Taxable Income if lower) | $ 32,000 |
| 50 percent of Wages | $ 2,500 |
| 25 percent of Wages | $ 1,250 |
| 2.5 percent of Assets | $ 25 |
| Greater of 50 percent Wages vs. 25 percent Wages & Assets | $ 2,500 |
| Lesser of QBI (or Defined Taxable Income) and Wage/Asset | $ 2,500 |
Calculation for Specified Service Business in case of within Phaseout Range:
| 20 percent of QBI (multiplied by applicable percentage) | |
| Superior of Wage and Asset (multiplied by applicable percentage) | |
| Difference Between QBI and Greater of Wages/Assets | $ 0 |
| Reduction to QBI | $ 0 |
| Phaseout Deduction | $ 32,000 |
Conclusion
The net amount of the business’ qualified items that include income, gain, deduction, and loss and does not include investment-related items of income, gain, deduction, and loss is covered up in QBI.
The small business owners can better understand and make good use of qualified business income deduction as tax breaks can be applied in their business. And in case you still find it confusing then you can further read the qualified business income deduction IRS FAQs as well as some of the instructions to qualified business income deduction form i.e. Form 8995 and Form 8995-A that will defiantly help you in understanding qualified business income deduction better.
Frequently Asked Questions
Who qualifies for the QBI deduction?
If your total taxable income is $ 163,300 in case of single filers or $ 326,600 in case of joint filers or married person then you qualify for QBI deduction in 2020.
How is the qualified business income deduction calculated?
By following the necessary steps, you can calculate qualified business income deduction:
Step 1: First you need to know whether your business is a specified service business or not. As there exist different types of businesses that qualify as an SSTB
Step 2: You need to Calculate your total taxable income for the specific or particular year. And in case your total taxable income is less than $ 157,500 or $ 315,000 if married and filing jointly then full 20 percent QBI deduction can be claimed up.
Step 3: Here you need to see,
- If the business is an SSTB, and
- If the business is not an SSTB
Step 4: take up 20 percent of your qualified business income and apply the following limit as:
- 50 percent of your share of W-2 wages paid by the business, or
- 25 percent of individuals wages, added to 2.5 percent of your share of qualified property
What qualifies as a qualified business income?
In order to be qualified for QBI, the income should be domestic and does not comprise of employee wages, capital gains or losses, interest income, and certain dividend income.
Do I qualify for the QBI?
If you are an individual, trusts, and estates then you do qualify for the QBI. Whereas, the following do not qualify for the QBI:
- Sole proprietorship s.
- Partnerships.
- S corporations.
- Limited liability companies (LLCs).
How do I claim QBI deduction?
You can claim QBI deduction by knowing your taxable income and then figuring out your adjusted gross income on qualified business income Form 1040 and then calculating the pass-through deduction or QBI deduction.
How does the Qualified Business Income deduction impact rental property?
In case of qualified business income deduction rental property can qualify for QBI deduction in case they meet the following requirements:
- For each real estate enterprise, they need to maintain separate books and records
- Over 250 or more hours of “rental services” are provided by or for the purpose of real estate enterprises each year.
- Rental services should be documented appropriately.
- Try to evade the triple-net lease deception.