What is the Qualified Business Income Tax Deduction? Everything You Need to Know
If you are currently self-employed or run a small business, there are many different tax deductions that you might be able to qualify for. One example of these deductions is the Qualified Business Income (QBI) deduction, which can lower your federal tax obligations by as much as twenty percent.
That’s a pretty big chunk of tax savings—and, contrary to other small business deductions, you do not need to itemize expenses in order to qualify.
Let’s take a look at how the Qualified Business Income deduction works and answer some of your most pressing questions:
What is the Qualified Business Income Deduction?
The Qualified Business Income tax deduction is a standardized federal tax deduction available for sole proprietors and many small business owners. Also known as the “Section 199A Deduction”, the Qualified Business Income Deduction was first introduced by the IRS in 2017.
According to the IRS, “Many individuals, including owners of businesses operated through sole proprietorships, S corporations, trusts and estates may eligible for a qualified business income deduction.” The IRS further explains, “The deduction allows them to deduct up to 20 percent of their qualified business income (QBI), plus 20 percent of qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income.”
Who is Eligible for the Qualified Business Income Deduction?
In order to qualify for the QBI deduction, you must be operating your own small business—in fact, the IRS explicitly states, “income earned by a C corporation or by providing services as an employee isn’t eligible for the deduction.”
The deduction is limited to people who have “pass-through income”, which is income reported on your personal tax returns.
But if you are running a small business—and that includes sole proprietorships, partnerships, S corporations, and most LLCs—then you should be able to fully qualify, as long as your business is structured correctly, and your income is under the federal limit.
For income that was earned in 2021 (some of which will not be reported until 2022), the individual income limit for claiming QBI is $164,900 and the income limit for people filing jointly is $329,800. Incomes above these thresholds may be able to claim a partial deduction after filing an additional form (8995-A).
What is Considered “Qualified Business Income”?
The IRS offers a pretty broad definition of what can be considered Qualified Business Income. According to the IRS, it is “the net amount of qualified items of income, gain, deduction and loss with respect to any trade or business”—in other words, the net profit that was generated from your business (and was then passed onto you as income).
The QBI deduction is very popular among sole proprietors and other small business owners due to the fact it is very easy to claim and does not require you to do your deductions by hand. However, you should still work with a certified public accountant (CPA) to determine if there are any other tax deductions that you might qualify for.
When claiming the Qualified Business Income tax deduction, it is important to know that some types of income will not qualify. For example, the IRS explicitly excludes capital gains, dividend payments, interest income, and income that was earned outside the US from being claimed as QBI.
How Do I Claim the Qualified Business Income Deduction?
Before you can claim the Qualified Business Income deduction, you will need to begin by completing your federal income taxes (often through Form 1040), which should account for all of the income you earned in the given tax year.
Then, you will need to isolate that qualified net income that can be specifically assigned to your business—that means excluding “non-qualified” sources of income, such as capital gains, dividends, and non-business interest.
Once you have calculated your taxable income, you can then use IRS Form 8995 to calculate your deduction. If your income is above the threshold ($164,900 for individuals, $329,800 for joint-filers), you will need to fill out form 8995-A.
After that, you will be able to claim the Qualified Business Income deduction and will be able to enjoy paying up to 20 percent less in federal income taxes.
Do you have questions about QBI or other major tax deductions? Don’t worry—at WKB Accounting LLC, we work hard to ensure each of our clients can claim as many tax deductions as possible.