The Qualified Business Income Deduction (QBI or QBID) is a tax deduction available to many owners of pass-through businesses. If you have income from a qualified trade or business, you may be able to deduct up to 20% of your qualified business income on your federal tax return, subject to IRS limitations and eligibility rules.
The Qualified Business Income Deduction section appears within Schedules C, E, and F and is used to determine whether your income qualifies and whether any adjustments need to be made before calculating the deduction.
Does This Business Qualify for the Qualified Business Income Deduction?
Many pass-through businesses qualify for the deduction, including:
- Sole proprietorships
- Partnerships
- S corporations
- Certain trusts and estates
- LLCs taxed as:
- Sole proprietorships
- Partnerships
- S corporations
Generally, the business must be a qualified trade or business operating within the United States.
Qualified Business Income Adjustment Amount
In most situations, the program automatically calculates your Qualified Business Income based on the income and expenses entered on your return.
The Qualified Business Income Adjustment Amount field is used when your calculated QBI needs to be adjusted to reflect special circumstances.
Any amount entered here adjusts the QBI reported from the Schedule C, E, or F activity and ultimately affects the amount reported on Form 8995 or Form 8995-A.
Situations that may require an adjustment include:
- Excluding income from a Specified Service Trade or Business (SSTB)
- Adjusting for qualified business losses
- Certain capital investment adjustments
- Other business deductions or expenses that affect QBI
If you're unsure whether an adjustment is required, review the IRS instructions for Form 8995 or consult a qualified tax professional.
Where Does This Adjustment Go?
Any adjustment entered in this section carries to:
Form 8995, Line 1 (or the applicable QBI worksheet used by the IRS).
W-2 Wages Paid
Some higher-income taxpayers are subject to additional Qualified Business Income Deduction limitations.
In those situations, the IRS may consider:
- W-2 wages paid by the business
- Qualified property used in the business
If your business pays W-2 wages and you're subject to the wage limitation rules, entering accurate wage information is important because it may increase the allowable deduction.
For many taxpayers below the applicable income thresholds, no wage limitation applies.
Unadjusted Basis of Depreciable Assets Adjustment Amount
The Qualified Business Income Deduction may also take into account certain business property.
The Unadjusted Basis of Depreciable Property generally refers to the original cost of qualified business assets before subtracting depreciation.
Examples may include:
- Buildings
- Equipment
- Machinery
- Other qualified depreciable business property
When determining the unadjusted basis:
- Use the original purchase price or cost basis.
- Do not reduce the amount for depreciation already claimed.
- Only include qualified property used in the business.
This information may be used when the IRS wage and property limitations apply.
Use Amounts for QBI Deduction (Schedule E)
For rental activities reported on Schedule E, additional consideration may be required. Rental income doesn't automatically qualify for the Qualified Business Income Deduction.
Generally, rental activities are more likely to qualify when they rise to the level of a trade or business.
Examples may include situations where substantial services are provided, such as:
- Property management activities
- Ongoing operational involvement
- Regular and continuous rental business operations
This is commonly referred to as a real estate trade or business. If your rental activity qualifies, the net income may be eligible for the QBI deduction.
Is Specified Service Business (Schedules C and F)?
A Specified Service Trade or Business (SSTB) is a business operating in certain service-based fields identified by the IRS.
Examples include:
- Law
- Accounting
- Healthcare
- Consulting
- Financial services
- Performing arts
- Other specified professional services
If your business is an SSTB, the Qualified Business Income Deduction may be reduced or eliminated once your taxable income exceeds certain IRS thresholds.
Because these income limitations are adjusted periodically, the program automatically applies the applicable rules based on the information entered on your tax return.
Do I Need to Calculate the Deduction Myself?
No. In most cases, the program automatically calculates:
- Qualified Business Income
- Qualified Business Income adjustments
- Qualified Business Income Deduction limitations
- Form 8995 or Form 8995-A
You should simply enter your business income, expenses, wage information, and any applicable adjustments accurately.