As a reminder, the qualified business income deduction (QBI) gives small business owners an additional 20% tax deduction on their net business income, which helps reduce their total taxable income. If your small business meets all of the qualifications for the QBI deduction, you can take this deduction on your personal tax return.
What Is Qualified Business Income?
Qualified business income includes specific qualified income, gains or losses, and deductions from business income. Only items included in taxable income are counted and income earned through a C corporation is not eligible. Specific types of income must be removed from the calculation for the QBI deduction. You can count most of your business’s net income from business operations. Qualified business income does not include the following types of income:
Capital gains, losses, or dividends from investmentsWage incomeInterest income or annuities that is not associated with the businessQualified real estate investment trust (REIT) dividendsQualified publicly traded partnerships (PTP) incomeBusiness income from outside the U.S.Guaranteed payments to a partner
Qualified REIT dividends and PTP income are separate from the rest of your qualified business income. The IRS offers more specific information on its site. Other less common types of income may not be included in income for the QBI calculation. Instructions for Form 8995 may be able to help. The QBI deduction may also be limited by the wages or salary paid to employees and the cost of some property owned and recently purchased by the business, called “unadjusted basis immediately after acquisition (UBIA).” The qualified business income deduction (QBI) allows small business owners to take a 20% deduction based on the net income of their business, in addition to regular business deductions. The details of this deduction are in section 199A of the tax code, which is why the deduction is sometimes called a 199A deduction.
Which Business Types Can Claim the QBI Deduction?
Several factors determine whether you qualify for this tax deduction:
Your business must be a sole proprietorship, partnership, or S corporation You need to know the amount of net income from that business for the year, to see what income and deductions do or do not qualify You must calculate your total taxable income from all sources for the year
Basically, only pass-through entities can take this deduction. In pass-through businesses, the income from the business is taxed on the owner’s personal tax return. Pass-through businesses are:
Sole-proprietors and single-owner limited liability companies (LLCs) filing federal income taxes on Schedule C Partners in partnerships and multiple-member LLC owners filing partnership returns S corporation shareholders filing Schedule K-1 to report their share of S corporation income
Specified Services Trades or Businesses (SSTBs)
Some types of businesses, called specified services trades or businesses (SSTBs), may not be eligible for the entire QBI deduction if the incomes of the owners are above certain limits, which change every year. These SSTBs include businesses involving the performance of services based on the reputation or skill of employees or owners (like health care, law, accounting, performing arts, consulting, athletics, financial services, and investing).
How To Claim the QBI Deduction on Your Tax Return
The QBI deduction is calculated on one of two forms, depending on the amount of your taxable income. Form 8995 is the simplified computation form. You can use this form if your taxable income is not greater than $170,050 and you’re a single filer, married filing separately, head of household, or widow(er) for tax year 2022. The income limit is $340,100 if you’re married filing jointly. Form 8995-A is for more complicated situations, including SSTBs and owners of multiple businesses.
Partners and S-Corporation Owners
S-corporation owners and partners (including owners of LLCs taxed as partnerships) calculate the QBI deduction differently. First, the total QBI for the business is calculated on one of the two forms above. Then, each owner’s share of the QBI is calculated and entered in a separate line on the owner’s Schedule K-1, along with other income of the owner. The information on Schedule K-1 is entered with the owner’s other income on the owner’s personal tax return. Each situation is reviewed based on all the facts and circumstances. If you want to take the QBI deduction for your real estate business, check with a licensed tax professional.
