You may be eligible for the qualified business income deduction if you are a small business owner.
The Qualified Business Income (QBI) deduction provides small business owners with an additional 20% tax relief on their net business income, helping to reduce their total taxable income. To qualify for the qualifying business income deduction, your business cannot be a C corporation, and you are required to pay business taxes on your tax return. Not all types of income are considered when calculating the QBI deduction, but most of your company's net income from business activities will be eligible.
If your small business meets the QBI deduction requirements, you can claim this deduction on your personal tax return. Here's how it's done.
What is qualifying business income?
Qualifying business income includes deductions from specified qualifying income, profit or loss, and business income. Only items included in taxable income are considered, and income earned through a C corp is not eligible.
Certain types of income must be removed from the calculation of the QBI deduction. You can derive most of your net income from business activities.
Qualifying business income does not include the following types of income:
Guaranteed payments to a partner
Income from a business outside the United States.
Income from qualified publicly traded partnerships (PTPs)
Interest or annuity income not associated with the business
Profits, losses, or dividends from investments
Qualified dividends from REITs (real estate investment trusts)
Wage income
Eligible REIT dividends and PTP income are segregated from other eligible trading income. Other less common types of income may not be included in the calculation of QBI income.
The qualified business income deduction may also be limited by wages or salaries paid to employees, and the cost of certain assets recently acquired by the business referred to as the "UBIA (unadjusted basis immediately after acquisition)."
Note
Although qualified business income eligibility is for business income, the deduction is for entrepreneurs, not businesses. The owner's total taxable income from all sources is considered to determine eligibility for this deduction.
The Qualifying Business Income (QBI) deduction allows small businesses to take a 20% deduction based on their net business income in addition to normal business deductions. Details of this deduction can be found in Section 199A of the Internal Revenue Code, which is why the deduction is sometimes referred to as the 199A deduction.
What types of businesses can claim the QBI deduction?
Several factors determine whether you are eligible for this tax deduction:
Your business must be a Partnership, Sole Proprietorship, or S Corporation.
You need to know the net income figure for this business for the year to see which income and deductions are allowable and which are not.
You are required to calculate your total taxable income for the year.
Essentially, only pass-through businesses can make this deduction. In pass-through businesses, business income is taxed on the owner's personal income tax return.
Pass-through businesses are:
Partners in partnership and owners of LLCs filing partnership statements
S Corporation shareholders who file Schedule K-1 to report their share of S Corporation income
Sole proprietorships and LLCs that file federal income tax on Schedule C
Note
Corporations (C corporations) are not eligible for the qualified business income (QBI) deduction because the corporation's income is usually taxed separately from that of the owner.
Specified Services Trades or Businesses (SSTB)
Certain types of businesses, called specified service trade or businesses (SSTB), may not qualify for the full QBI deduction if the owners' income exceeds certain thresholds, which change each year. These SSTBs include companies that provide services based on the reputation or skills of employees or owners.
How to claim the Qualified Business Income (QBI) Deduction on your tax return
The QBI deduction is calculated in two ways.
Form 8995 is the simplified calculation form. You can the Form 8995 if your taxable income does not exceed $170,050 and you are single, married, and filing separately, head of household, or widowed for the 2022 tax year. If you are married and filing jointly, the income limit is $340,000.
Form 8995-A is for more complex situations, including SSTB and owners of multiple businesses.
S Corporations Partners and Owners
Owners and partners of S corporations calculate the QBI deduction differently. First, the total QBI for the company is calculated in one of the two forms above. Each owner's share of the QBI is then calculated and listed on a separate line of the owner's Schedule K-1, along with the owner's other income. Information from Schedule K-1 is entered with other of the owner's income on the owner's personal income tax return.
Note
The calculation of this deduction is complicated and different for each specific activity. To find out if you qualify and get help with the calculation, use the services of a certified tax professional or tax preparation software.
Frequently Asked Questions (FAQ)
How is QBI calculated?
To calculate the qualifying business income deduction, you must complete your personal income tax return and calculate your net business income. Certain types of ineligible income must be deducted from your net income. You can use the QBI table in Form 8995 instructions to see how the order of calculations works.
Can you claim a QBI deduction on your rental property?
Rental property owners are eligible for the QBI deduction if they meet certain conditions to qualify as a "trade or business." You do not need to participate physically in property rental activities to qualify.
Each situation is examined based on all the facts and circumstances. Consult a certified tax specialist if you wish to take advantage of the QBI deduction for your business.
Summary
Small business owners who pay business tax on their personal tax return are eligible for this deduction, but it does not apply to C Corps.
The deduction can be added to the deductions normally authorized for business expenses.
The qualifying business income deduction (QBI) is intended for entrepreneurs. The deduction is valid for up to 20% of eligible net business income.
FOR MORE INFORMATION ON HOW JIM McCLAFLIN, EA, NTPI FELLOW, CTRC CAN BEST HELP YOU WITH YOUR TAX FILING NEEDS, PLEASE CLICK THE BLUE TAB ON THIS PAGE.
THANKS FOR VISITING.
