The QBI will allow taxpayers to deduct up to 20 percent of their qualified business income plus an additional 20 percent for qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income. Individuals, estates, and trusts may qualify for the qualified business income deduction. However, the qualified business income deduction is subject to exceptions.
Let´s start with the basics:
What is a Qualified Business Income Deduction?
The qualified business income deduction is calculated as the net number of qualified items, which include income, gain, and deduction and loss from any qualified trade or business. Income may be derived from any or all of the following:
- S Corporations
- Sole proprietorships
There are two components of the qualified business income deduction:
The qualified business income deduction component is subject to limitations. The deduction equals 20 percent of qualified business income from a domestic business operating as a sole proprietorship, a partnership, an S corporation, or a trust or estate. The following categories fall under the QBI component:
- Type of trade or business
- Amount on W-2 wages paid by qualified trade or business
- Unadjusted basis immediately after acquisition of property
Limitations apply to the taxpayer’s taxable income based upon the trade or business and the amount on the taxpayer’s W-2 wages paid by a qualified trade or business. Limitations also apply to qualified property held by a trade or business. Keen in mind that the qualified business income may be reduced if the taxpayer is a patron of an agricultural or horticultural cooperative.
The real estate investment trust (REIT) or publicly traded partnership (PTP) is not limited by the W-2 wages or the UBIA of qualified property. The deduction equals 20 percent of the qualified REIT dividends and the qualified PTP income. However, there are limitations based upon the trade or business for the publicly traded partnership. The amount of the PTP income that qualifies for deduction may be limited by the PTP’s trade or business.
The qualified business income deduction will be the lesser of the QBI component plus 20 percent of the taxable income minus net capital gain for the REIT/PTP.
What QBI Does Not Include
The following items do not qualify for the qualified business income deduction. The list is not exhaustive:
- Income not connected to the conduct of business
- Items not included in taxable income
- Investment items such as capital gains or losses or dividends
- Qualified REIT dividends
- PTP income
- Annuities unless annuities are connected to the trade or business
- Amounts received as part of reasonable compensation from an S corporation
- Amounts received as part of guaranteed payments from a partnership
- Commodities transactions or foreign currency gains or losses
For more information, visit Facts About Qualified Business Income Deduction.
Determining a Qualified Trade or Business
A qualified trade or business is one in which you are engaged in a trade or business, involved in the continuity and regularity of trade or business, with the expectation of income or profit.
According to IRS Publication 535, a qualified trade or business is any section 162 trade or business subject to the following exceptions:
- A qualified trade or business cannot be a trade or business conducted by a C corporation.
- A qualified trade or business cannot be a trade or business where W-2 wages are earned as a result of performing services as an employee.
- A qualified trade or business cannot be a trade or business where taxable income exceeds the threshold amount for specified service trades or businesses (SSTBs).
The SSTB is a trade or business that involves the performance of service in specific fields such as health, accounting, law, consulting, and financial services.
What is a Specified Service Trade or Business?
A specified service trade or business (SSTB) is a trade or business involving the provision of services. This includes the following categories under the performance of services:
- Fields: These include health, law, accounting, actuarial services, performing arts, consulting, athletics, financial services, brokerage services, and any other trade or business that relies on the reputation or skill of one or more employees.
- Investment management services: These include trading, dealing in securities, partnership interests, and/or commodities.
Filers will be able to deduct the lesser of 20 percent of their QBI, plus 20 percent of qualified REIT dividends and qualified PTP income, or filers will be able to deduct 20 percent of taxable income minus net capital gain. If income is earned through a C corporation or is earned as a result of providing services as an employee, the deduction is not applicable regardless of the taxpayer’s taxable income.
Also, any taxpayer’s income above the threshold amount may be limited in their eligibility to claim the QBI based upon W-2 wages paid by the trade or business. Single filers who report taxable income over $207,500 and married couple filing a joint return whose taxable income exceeds $415,000 are not eligible for the QBI if the income is from an SSTB
This article is a general overview of qualified business income deduction. Savage Accountancy offers the best individual and business tax planning services in Carmel, CA. Our expert accountants provide attentive tax preparation and detailed consultations. Reach out to us to learn about the money that you could be saving on this year’s return!