Section 199A within the Internal Revenue Code grants individuals a deduction for Qualified Business Income (QBI) deriving from a qualified trade or business managed either directly by the individual or through a pass-through entity.
The QBI deduction encompasses two primary components:
- a deduction of potentially up to 20% of QBI, subject to certain restrictions, and
- a deduction related to qualified Real Estate Investment Trust (REIT) dividends and income from Publicly Traded Partnerships (PTPs). Limitations on QBI deduction encompass:
- The nature of the trade or business
- The individual's taxable income.
- he total amount of W-2 wages paid by the qualifying business
- The unadjusted basis immediately after acquisition (UBIA) of qualified property held by the trade or business.
The QBI deduction is computed as the lesser of:
- 20% of the aggregated qualified business income.
- 20% of the taxable income subtracted by the individual's net capital gain amount, if applicable.
Who qualifies for the QBID?
The Qualified Business Income Deduction (QBID) is open to individuals, trusts, and estates with qualified business income, along with taxpayers who receive qualified REIT dividends or qualified income from Publicly Traded Partnerships (PTPs). Eligibility for the QBID exists regardless of whether a taxpayer opts for itemizing deductions on Schedule A or chooses the standard deduction. However, income earned through providing services as an employee or derived from a C corporation does not meet the criteria for QBID qualification.
How is the calculation for the Qualified Business Income Deduction determined?
The QBID is calculated as the lower of two options:
- 20% of the taxpayer’s qualified business income (QBI), combined with 20% of the taxpayer’s qualified REIT dividends and qualified income from Publicly Traded Partnerships (PTPs). or
- 20% of the taxpayer’s taxable income, adjusted by any net capital gains.
The restriction on taxable income does not apply to income from a Specified Service Trade or Business (SSTB) if the taxpayer's income falls below the specified limit. If the taxpayer's taxable income exceeds the taxable income threshold, the QBID might be subject to limitations based on:
- Whether the business falls under a Specified Service Trade or Business (SSTB).
- The amount of W-2 wages disbursed by the business.
- The unadjusted basis of particular property utilized by the business.