The qualified business //romanbusiness.com/ income (QBI) deduction is a tax deduction that allows eligible self-employed and small-business owners to deduct up to 20% of their qualified business income on their taxes. The deduction was created by the Tax Cuts and Jobs Act of 2017 and is available for tax years beginning after December 31, 2017.
To qualify for the QBI deduction, your business must meet the following requirements:
- It must be a pass-through business, meaning that the profits and losses of the business flow through to the owner’s personal tax return.
- It must be a domestic business, meaning that it is located in the United States.
- It must be an active business, meaning that you are actively involved in the management and operation of the business.
- It must not be a specified service trade or business (SSTB). SSTBs are businesses that rely on the unique skills or reputation of the owner, such as doctors, lawyers, and accountants.
The QBI deduction is limited to the lesser of:
- 20% of your QBI
- 20% of your taxable income minus net capital gain
If your taxable income is above certain limits, the QBI deduction will be phased out. For 2023, the phase-out limits are:
- $182,100 for single filers
- $364,200 for married filing jointly
- $321,450 for head of household filers
To calculate the QBI deduction, you will need to determine your qualified business income (QBI). QBI is the net amount of qualified items of income, gain, deduction, and loss from any qualified trade or business.
Qualified items of income include:
- Gross receipts from the trade or business
- Ordinary and necessary business expenses
- Depreciation and amortization deductions
- The deduction for self-employment tax
- The deduction for contributions to qualified retirement plans
Qualified items of loss include:
- Net operating losses
- Section 179 deductions
Once you have determined your QBI, you can calculate your QBI deduction by multiplying your QBI by 20%.
Example of a QBI Deduction Calculation
Let’s say you are a single filer with taxable income of $200,000 and $80,000 of QBI. Your QBI deduction would be calculated as follows:
- QBI: $80,000
- 20% of QBI: $16,000
- Phase-out limit: $182,100
Since your taxable income is below the phase-out limit, you can claim the full $16,000 QBI deduction.
Conclusion
The QBI deduction can be a significant tax savings for eligible self-employed and small-business owners. If you think you may qualify for the QBI deduction, you should consult with a tax advisor to determine if you are eligible and to calculate your deduction.