Qualified Business Income Deduction: Facts and Tips

As tax season has arrived, Many taxpayers are looking for ways to write off as many expenses as possible. Our tax professionals and enrolled agents can help you uncover these sometimes-hidden tax benefits In & Near Bronx, NY.

In 2017, the Tax Cuts and Jobs Act (TCJA) introduced the qualified business income deduction (QBI). Also known as the 20% Pass-Through Deduction or IRC 199A deduction, QBI allows owners of pass-through businesses to deduct up to 20% of their qualified business income from a qualified trade or business.

Qualifying for the QBI deduction can be complicated. The proposed regulations rest on a tax question that has no clear answer: What is the 20% Qualified Business Income Deduction, and who qualifies for it? Instead of directly answering this question, the IRS provides a list of eligibility criteria. To qualify for the QBI deduction, an individual or entity must meet these specific criteria.

Due to the complexity of the QBI deduction, you should consult a tax expert. But in case you want to know more about QBI before your tax consultation, keep on reading.
In this article, we’ve answered some of the frequently asked questions about QBI, so if you’re wondering, Is rental income QBI? or What businesses are not QBI eligible? you’re in the right place.

What Is the 20% Qualified Business Income Deduction?

Qualified business income deduction (QBI) is a type of tax deduction for small business owners and self-employed individuals that allows them to deduct up to 20% of their qualified business income on their taxes.

According to the IRS, individuals with a combined taxable income under $164,900 in 2021 and joint filers with a combined income under $329,800 in 2021 will qualify. By 2022, the single filer limit will reach $170,050, and the joint filer limit will reach $340,100.

If your business income exceeds that limit, complicated IRS rules determine whether you can claim a full or partial deduction.

Who Can Claim the QBI Deduction?

You can claim the qualified business income deduction if you have “pass-through income” — which is business income that you report on your personal tax return. Among the entities that qualify for this deduction are:

A sole proprietorship
Partnerships
Limited liability companies (LLCs)
S corporations

How to Get a Qualified Business Income Deduction?

Profits from a business are generally considered qualified business income. W-2 wages from an S corporation or guaranteed payments from a partnership are not considered qualified business income.

If business owners’ taxable income does not surpass the mentioned thresholds, they can use this formula for calculating their individual tax returns. Assuming that the business’s taxable income exceeds these thresholds, the deduction will factor in limitations on the wages it pays to its employees and the depreciable assets it owns.

How Is the QBI Deduction Calculated?

To calculate your qualified business income (QBI) deduction, you must complete your tax return. Net income must be reduced by certain non-qualified types of income, including capital gains, dividends, and non-business interest income.

The QBI deduction can be calculated using IRS Form 8995 if your total taxable income for the whole year is less than a specific amount based on your filing type. For 2021, if you have taxable income over $164,900 (single, married filing separately, head of household, or qualified widow or widower); or $329,800 (married filing jointly), you should use IRS Form 8995-A. The QBI calculation ultimately goes from the 8995-A or 8995 form to your tax return.

To see how the calculation order works, refer to the QBI Flow Chart on page 5 of the Instructions for Form 8995.

What Types of Income Are Not QBI Eligible?

Certain types of income must be excluded from the calculation of qualified business income. If you own a business, you can count most of your net income, but you can’t include these:

• Items that are not properly includible in income, such as losses or deductions disallowed under the basis, passive loss, at-risk, or excess business losses rules.
• Investment items like dividends, capital gains, or losses.
• Interest income not correctly allocated to a trade or business.
• Wage income.
• Income that is not directly related to conducting business in the United States.
• Foreign currency gains or losses or commodities transactions.
• Profits, losses, or deductions from notional principal contracts.
• Pensions (unless received as part of a trade or business).
• The compensation received from an S corporation.
• An amount received as a guarantee payment from a partnership.
• Received payments by a partner for services they are not performing in their capacity as a partner.
• Dividends from qualified REITs.
• Income qualifying for PTP.

QBI deductions may also be limited by the wages or salaries paid to employees, along with the cost of some recently acquired property owned by the business, called “unadjusted basis immediately after acquisition (UBIA).”

Is Rental Income QBI?

Real estate rental property owners may qualify for the qualified business income (QBI) deduction if they meet specific requirements to be considered a “trade or business.” You don’t have to participate materially in the activity of renting real estate to qualify.

Every situation is reviewed in light of all the facts and circumstances. To determine if you qualify for the QBI deduction for your real estate business, speak to a licensed tax professional. Especially if your real estate is in and near Bronx, NY, our local tax experts might be of great help.

QBI Deduction Facts and Tips

1. You are eligible if you own an S corporation, a partnership, a limited liability company (LLC), or a sole proprietorship. You can also claim it if you are a trust or estate.
2. The deduction is designed to lower the tax rate on QBI to a level closer to corporate tax rates.
3. Deductions consist of two components: 20% of QBI earned by businesses engaged in domestic operations as sole proprietorships, S corporations, partnerships, trusts, or real estate; and 20% of the taxpayer’s qualifying REIT dividends and qualified public partnership income.
4. The qualified business income is the net amount of a taxpayer’s qualified items of income, gains, deductions, and losses related to a qualified trade or business. Gains, deductions, and losses are qualified as long as they’re directly related to the conduct of a trade or business in the U.S. and are included in calculating taxable income.
5. QBI doesn’t necessarily equal net income even in qualified trades and businesses. As well as profit or loss from Schedule C, QBI must also be adjusted by certain other gain or deduction items related to the business.
6. An approved trade or business is any trade or business other than a specified service trade or business (SSTB). SSTBs, however, are treated as qualified trades or businesses for taxpayers whose taxable income is under a threshold.
7. The SSTBs are law, health, actuarial science, accounting, certain performing arts, athletics, consulting, financial services, brokerage services, trading, investment, dealing securities, etc., where the principal asset is the reputation or skill of the employees or owners.
8. There are limits based on W-2 wages. An inflation-adjusted threshold amount is also considered to apply SSTB rules. The threshold amounts for the 2021 tax year are $164,900 for single filers, $164,925 for married filers filing separately, and $329,800 for married filers filing jointly. Generally, the limits take effect over a $50,000 range ($100,000 for a joint return). In other words, the deduction decreases, so that at the top of the bracket ($214,900 for singles and heads of household; $214,925 for married filing separately; and $429,800 for married filing jointly), there is no deduction for income from an SSTB.
9. The pass-through deduction is calculated at the shareholder or partner-level for businesses conducted as partnerships or S corporations.

If you’re still not sure you qualify for QBI deduction, we understand. Count on our tax experts in SCL Tax Services who’ve been helping people in and near the Bronx, Eastchester, Mt Vernon, Westchester, and Yonkers, NY. Let us take care of your taxes so you won’t have to. So, Contact our tax office in Bronx or fill the form below.

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