Qualified Business Income (QBI) is generally the net income earned from a qualified trade or business. It's used to determine whether you're eligible for the Qualified Business Income Deduction (QBID), also known as the Section 199A deduction or the 20% small business deduction.
If you're self-employed or own a qualifying pass-through business, you may be able to deduct up to 20% of your qualified business income on your federal tax return, subject to IRS rules and income limitations.
How Is QBI Calculated?
In general, QBI starts with your net business income and excludes certain types of income that aren't considered qualified business income for Section 199A purposes.
Items that are generally not included in QBI include:
- Wages reported on a Form W-2 (except income reported by a statutory employee)
- Capital gains and capital losses
- Dividend income
- Interest income not properly allocable to the business
- Annuity income
- Foreign currency gains and losses
- Reasonable compensation paid to shareholder-employees of an S corporation
- Guaranteed payments made to partners or LLC members treated as partners
Because these items are excluded, they don't increase the amount of income eligible for the QBI deduction.
What Businesses Qualify?
The QBI deduction is generally available to owners of pass-through entities, including:
- Sole proprietorships reported on Schedule C
- Partnerships
- S corporations
- Certain trusts and estates
These businesses are called "pass-through" entities because the income passes through to the owner's individual tax return rather than being taxed at the business level.
What Is the Qualified Business Income Deduction?
The Tax Cuts and Jobs Act created the Qualified Business Income Deduction to provide tax relief for many small business owners and self-employed individuals.
If you're eligible, you may be able to deduct up to 20% of your qualified business income from your taxable income.
This deduction:
- Reduces your taxable income
- May lower your federal income tax
- Does not reduce your self-employment tax
- Is claimed on your individual tax return
The actual deduction may be less than 20% depending on factors such as your income level, business type, employee wages, and other IRS limitations.
Do I Need to Calculate QBI Myself?
The program automatically calculates your Qualified Business Income and Qualified Business Income Deduction based on the business information entered on your return.
To ensure the calculation is accurate, be sure to enter:
- All business income
- All business expenses
- Schedule C information
- Partnership and S corporation information, if applicable