The Qualified Business Income (QBI) deduction enables eligible small business owners and self-employed workers to deduct 20% of their qualified business income from their taxable income. The tax benefit, which applies to pass-through businesses, was introduced through Section 199A of the Internal Revenue Code and will remain in effect from 2018 until 2025.
Pass-through entities do not pay business income tax directly. The business profits transfer to the owner's personal tax return. This tax system applies to sole proprietors and partnerships and LLCs and S corporations.
The example shows that your pass-through business can deduct up to $60,000 from its $300,000 earnings, which will significantly decrease your total tax obligation.
Who Can Claim the QBI Deduction?
You need to receive income from a pass-through business to become eligible. The deduction remains accessible to you even when you choose to take the standard deduction instead of itemizing your deductions.
However, eligibility depends on:
Your total taxable income
The type of business you operate
- W-2 wages paid
- Business assets
Some businesses face additional restrictions. The defined service trades and business operations require Specific Service Trade and Business (SSTB) designation which includes the following professional fields:
- Law
- Accounting
- Medical services
- Consulting
- Financial services
- Performing arts
The QBI deduction for SSTBs will decrease or stop completely when your income reaches the IRS threshold.
Income Limits and Wage Rules
Non-SSTB organizations need to use wage and property restrictions for their highest paid employees. The company can use either 50 percent of W-2 wages or The company can use 25 percent of W-2 wages together with 2.5 percent of qualified property The company can use 25 percent of W-2 wages together with 2.5 percent of qualified property
The term qualified property describes assets which can be depreciated and which still have remaining useful life. The QBI deduction calculation process requires
Basic formula:
QBI Deduction = Lesser of
20% of Qualified Business Income
20% of Taxable Income (minus capital gains)
W-2 wages and property assessments need to be included in tax calculations for taxpayers with higher incomes.
Final Thoughts
Eligible business owners can utilize the QBI deduction to decrease their tax liabilities yet the deduction comes with complicated regulations. The services of a CPA or tax professional provide businesses with precise calculations and legal compliance.
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