7 FAQs About the Qualified Business Income Deduction

You could potentially be leaving tens, or even hundreds, of thousands of dollars in the government's pocket rather than yours.

There are lots of nuances to the proposed 199A deduction for qualified business income (QBI). This post is in no way exhaustive, but it will hopefully answer enough basic questions to give you a better idea about what to discuss with a tax professional regarding the possibilities of receiving this deduction.

What is qualified business income (QBI)?

QBI represents the net amount of qualified items of income, gain, deduction, and loss connected to each of your qualified trades or businesses. It includes items allowed in the determination of taxable income for the tax year that are also connected with conducting a trade or business within the U.S. or Puerto Rico.

It does NOT include:

• Capital gains and losses, dividends, or interest

• Compensation paid by an S corporation to shareholders

• Guaranteed payments by a partnership to a partner for services rendered

• Income from employment

Is my trade or business "qualified"?

Qualified business income must come from a qualified business and pass through to an eligible person. It is defined as any trade or business other than a specified service trade or business or employment. Service trades or businesses that do not qualify generally involve performance of services in health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, or brokerage services.

Does my income qualify as QBI (pass-through income)?

Pass-through income aims to "protect small business owners from double taxation: one tax bill for the company and one for the individual." This tax structure applies only to partnerships, sole-proprietorships, and S corporations.

Am I eligible for the QBI deduction?

General eligibility parameters include:

• Eligible individuals are not employees of others

• Your business is not a specified service trade

• Your income comes from a pass-through entity

• You do not need to itemize to claim the deduction

What does the QBI deduction do?

The deduction reduces your taxable income. It does not impact the calculation of self-employment tax.

How much is the QBI deduction?

For those whose taxable income does not exceed the income threshold ($315,000 for joint filers and $157,500 for other taxpayers), the deduction is generally the lesser of 20% of QBI or 20% of taxable income. If taxable income exceeds the threshold, the deductible amount is calculated using W-2 wage limitations.

What are the limitations on the QBI deduction?

Limitations apply once taxable income exceeds the threshold amount. The W-2 wage limitation phases in with calculations involving ratios, wages, qualified property, and corporate tax structure.

Motivation to act now

Don't let complexity deter you from exploring potential savings. Consider coordinating W-2 wages with QBI calculations to maximize your deduction. Professional guidance can help identify significant tax savings opportunities.