Qualified Business Income Deduction

What Is Qualified Business Income Deduction ?

Qualified Business Income Deduction is the net amount generated from any eligible U.S. trade or business on qualified items of gain, loss, income and deduction. Only those items which are part of taxable income are counted.

• For tax years starting after December 31, 2017, qualified business income (QBI) deduction which is also known as Section 199A is applicable to partnerships, sole proprietorships, S corporations and some estates and trusts.
• Qualified taxpayers are allowed by this deduction to subtract up to 20 percent of their qualified business income (QBI) alongside 20 percent of the dividends of qualified real estate investment trust (REIT) and income on qualified publicly traded partnership (PTP).
• However, incomes not eligible for the deduction are those earned via a C corporation or by extending services as an employee.

Factors That Determine If Your Business Is Eligible For This Tax Deduction:

• First of all, you will have to ascertain if the type of business you have is eligible for this deduction.
• Following that, you have to determine how much net income your business earns for the year. Additionally, you have to determine the total amount of taxable income you will have to pay as a taxpayer for the year.
• The business incomes mentioned below aren’t included for the deduction.
• If you have an income which is beyond the limit described below, the deduction amount may be slashed or eliminated.
• QBI deduction does not apply to a corporation since the corporation’s income and that of the owner is taxed separately.

Irrespective of whether deductions are itemized by taxpayers on Schedule A or the standard deduction taken by them, the deduction is available. First time qualified taxpayers can claim it on the federal income tax return for 2022 that they will be filing in 2023. 

The Qualified Business Income Deduction has the following two components:

1. QBI Component

• Domestic businesses which operate as an S corporation, sole proprietorship, via a partnership, or trust or estate comprise this component of the deduction which is equal to 20 percent of qualified business income deduction.
• The Qualified Business Income component is conditional upon limitations which in turn depend on the taxable income of the taxpayer. The type of business or trade, the amount of W-2 wages paid by the qualified trade, and the trade or business holding the unadjusted basis immediately after acquisition (UBIA) of qualified property are included under the taxpayer’s taxable income.
• In case the taxpayer is a patron of a horticultural or agricultural cooperative, then the qualified business income deduction may be reduced by patron reduction.

2.    REIT/PTP Component

• The REIT/PTP component of the deduction sums up to 20 percent of the eligible REIT dividends and qualified income on PTP.
• The W-2 wages or the UBIA of qualified property do not limit this component.
• The amount of PTP income that is eligible for deduction may be restricted depending on the taxpayer’s taxable income and also on the PTP’s business or trade.
• The deduction is restricted to the lesser part of the QBI component alongside the REIT/PTP component or the net capital gain subtracted from 20 percent of the taxable income.
• The net amount of qualified items of deduction, gain, income and loss from any qualified trade or business inclusive of income coming from S corporations, some trusts, partnerships and sole proprietorships is considered QBID.
• In general, the deductible part of self-employment tax, self-employed health insurance, and deductions for contributions to qualified retirement plans such as SIMPLE, SEP and qualified plan deductions are included under this; however, it is not just limited to the aforementioned.

The Following Items Are Not Included By QBID:

• Eligible REIT dividends
• PTP income
• Wage income
• Some payments and dividends instead of just dividends
• Income, deductions or loss generated from notional principal contracts
• Taxable income that does not properly include items
• Investment items, for example, capital gains, dividends or losses.
• Trades or businesses that do not have properly allocable interest income
• Foreign currency gains or losses or commodities transactions
• Annuities except those received in association with the business or trade
• Amounts received from S corporation as reasonable compensation
• Partnerships that send in amounts as guaranteed payments
• Payments received by a partner for any services other than that of a partner

Income Type, Limits and other Exclusions:

• The deduction you choose also depends on the qualified business income’s QBI amount, however, you cannot count the following earnings for this purpose:
  • Income earned on business outside the United States
  • Income generated from business investments
  • W-2 income wages which are paid to an owner of S corporation
  • Guaranteed payments to a partner
• Certain other types of business income may be eligible for other deductions, however, may be excluded from the Qualified Business Income deduction.
• The Qualified Business Income deduction may be constrained by the cost of some owned property recently bought by the business and the amount of employee wages known as the “unadjusted basis immediately after acquisition (UBIA).”
• The Qualified Business Income deduction-QBID does not include self-employment tax deductions and is only on income generated from businesses for federal income tax purposes.