What is qualified business income?

Qualified business income (QBI) //romanbusiness.com/ is a type of income that is eligible for a tax deduction under Section 199A of the Internal Revenue Code. The deduction allows eligible taxpayers to deduct up to 20% of their QBI from their taxable income.

To be eligible for the QBI deduction, a taxpayer must meet the following requirements:

The taxpayer must be a U.S. citizen or resident alien.
The taxpayer must have earned income from a qualified trade or business.
The taxpayer’s taxable income must be below certain threshold amounts.

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What is a qualified trade or business?

A qualified trade or business is any trade or business that is not a specified services trade or business (SSTB). SSTBs include businesses that provide the following types of services:

Accounting, actuarial, legal, medical, or veterinary services.
Financial services, such as investment banking, securities brokerage, or financial planning.
Consulting services, such as management consulting, public relations, or marketing.
Theatrical, musical, literary, or artistic services.
Any other trade or business where the principal asset is the reputation or skill of one or more of its employees.

How is QBI calculated?

QBI is calculated by adding up the following items of income, gain, deduction, and loss from any qualified trade or business:

Ordinary income or loss from the trade or business.
Net capital gain or loss from the trade or business.
Section 1231 gains and losses from the trade or business.
Self-employment tax deduction.
Self-employed health insurance deduction.
Qualified retirement plan contributions.

QBI is then reduced by any deductions that are not directly related to the trade or business, such as personal expenses, interest expense on non-business debt, and state and local taxes.

How much of my QBI can I deduct?

The amount of QBI that you can deduct is limited to the lesser of the following:

20% of your QBI plus 20% of your qualified REIT dividends and qualified PTP income.
20% of your taxable income minus net capital gain.

For example, if your QBI is $100,000 and your taxable income is $200,000, your maximum QBI deduction would be $40,000.

Who can claim the QBI deduction?

The QBI deduction is available to individuals, estates, and trusts that meet the following requirements:

The taxpayer must be a U.S. citizen or resident alien.
The taxpayer must have earned income from a qualified trade or business.
The taxpayer’s taxable income must be below certain threshold amounts.

The threshold amounts are adjusted annually for inflation. For tax year 2023, the threshold amounts are:

$182,100 for single filers.
$364,200 for married couples filing jointly.
$91,050 for heads of households.

If your taxable income is above the threshold amount, your QBI deduction will be phased out. The phase-out begins at 20% of the threshold amount and ends at 50% of the threshold amount.

Conclusion

The QBI deduction is a significant tax break for small businesses. If you are a self-employed individual or own a pass-through business, you should consider whether you qualify for the QBI deduction.