What is the Qualified Business Income Deduction?

The qualified   business Recallbusiness.com income deduction (QBI) 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.

Who is Eligible for the QBI Deduction?

To be eligible for the QBI deduction, you must meet the following requirements:

  • You must be a U.S. citizen or resident.
  • You must be the owner of a pass-through business. This means that your business is not a C corporation.
  • Your business must be engaged in a qualified trade or business. This includes most businesses, but there are some exceptions, such as professional services businesses and businesses that are primarily engaged in holding assets.
  • Your taxable income must be below a certain threshold. For 2023, the threshold is $182,100 for single filers and $364,200 for married couples filing jointly.

How is the QBI Deduction Calculated?

The QBI deduction is calculated by multiplying your qualified business income by 20%. However, there are some limitations on the deduction. For example, the deduction is reduced if your taxable income is above a certain threshold. Additionally, the deduction is not available for businesses that are located in certain high-income areas.

Example of a QBI Deduction Calculation

Let’s say that you are a sole proprietor who owns a business that sells products and services. Your business has a taxable income of $100,000. Your qualified business income is $80,000. Because your taxable income is below the threshold, you are eligible for the full 20% QBI deduction. This means that you can deduct $16,000 from your taxable income.

How to Claim the QBI Deduction

To claim the QBI deduction, you must file Form 8995, Qualified Business Income Deduction Simplified Computation, with your tax return. The form is relatively simple to complete, but you will need to have some information about your business, such as your gross receipts and your qualified business income.

The QBI Deduction: A Tax Break for Small Businesses

The QBI deduction is a significant tax break for small businesses. It can reduce the amount of taxes that you owe, which can free up cash that you can use to invest in your business or to grow your business. If you are a small-business owner, you should consider whether you are eligible for the QBI deduction.