Qualified Business Income (QBI) is a crucial concept for business owners and investors looking to optimize their tax strategies and potentially boost their income. At income-partners.net, we help you navigate the complexities of QBI and connect you with partners who can help you maximize your financial benefits. Discover how QBI can unlock new opportunities for growth, strategic alliances, and increased profitability.
1. What is Qualified Business Income (QBI)?
Qualified Business Income (QBI) is the net amount of qualified items of income, gain, deduction, and loss from a qualified trade or business. It includes income from partnerships, S corporations, sole proprietorships, and certain trusts. Essentially, it’s the profit your business generates that is eligible for certain tax deductions.
To elaborate, QBI is a pivotal element in understanding the potential tax benefits available to many business owners. Here’s a more granular look:
- Net Amount: QBI is calculated after subtracting qualified business deductions from your business’s gross income.
- Qualified Items: These encompass revenues, deductions, and losses directly tied to your business operations.
- Eligible Business Structures: This primarily includes pass-through entities such as sole proprietorships, partnerships, S corporations, and certain trusts.
- Tax Planning: Understanding QBI allows for strategic tax planning, potentially lowering your overall tax liability.
2. Who is Eligible for the QBI Deduction?
Many owners of sole proprietorships, partnerships, S corporations, and some trusts and estates may be eligible for a Qualified Business Income (QBI) deduction for tax years beginning after December 31, 2017, and ending on or before December 31, 2025. This is also called the Section 199A deduction.
To clarify, the QBI deduction is designed to provide tax relief to small business owners and self-employed individuals. Here’s a breakdown of who generally qualifies:
- Pass-Through Entities: Businesses structured as sole proprietorships, partnerships, and S corporations are typically eligible. These entities pass their income through to the owners, who report it on their individual tax returns.
- Trusts and Estates: Certain trusts and estates that operate a qualified business may also be eligible for the QBI deduction.
- Individual Taxpayers: The deduction is claimed by individual taxpayers on their personal income tax returns, not by the business entity itself.
- Income Thresholds: Eligibility and the amount of the deduction can be affected by the taxpayer’s taxable income. Higher income levels may result in limitations on the deduction.
3. How is the QBI Deduction Calculated?
The QBI deduction allows eligible taxpayers to deduct up to 20 percent of their QBI, plus 20 percent of qualified Real Estate Investment Trust (REIT) dividends and qualified Publicly Traded Partnership (PTP) income. The deduction is limited to the lesser of the QBI component plus the REIT/PTP component or 20 percent of the taxpayer’s taxable income minus net capital gain.
Let’s break down the QBI deduction calculation step by step:
- Calculate 20% of QBI: The first step is to determine 20% of your qualified business income. For example, if your QBI is $100,000, this amount would be $20,000.
- Calculate 20% of REIT Dividends and PTP Income: Next, calculate 20% of your qualified REIT dividends and qualified PTP income. This component is added to the QBI portion.
- Determine Taxable Income: Calculate your taxable income, which is your adjusted gross income (AGI) less any deductions.
- Calculate 20% of Taxable Income (Less Net Capital Gain): Calculate 20% of your taxable income, after subtracting any net capital gains. This is one of the limits on the deduction.
- Apply the Limitations: The QBI deduction is limited to the smaller of:
- The sum of 20% of QBI plus 20% of REIT dividends and PTP income.
- 20% of the taxpayer’s taxable income (less net capital gains).
- High-Income Taxpayers: For those with higher incomes, there are additional limitations based on W-2 wages paid by the business and the unadjusted basis immediately after acquisition (UBIA) of qualified property.
- Claim the Deduction: Finally, claim the QBI deduction on your individual income tax return using Form 8995 or Form 8995-A, depending on your income level and the complexity of your business.
This structured approach ensures you accurately calculate and claim the QBI deduction, maximizing your tax savings.
4. What is Included in Qualified Business Income?
QBI includes the net amount of qualified items of income, gain, deduction, and loss from any qualified trade or business. Generally, this includes the deductible part of self-employment tax, self-employed health insurance, and deductions for contributions to qualified retirement plans (e.g., SEP, SIMPLE and qualified plan deductions).
To be more specific, here’s a detailed list of what is typically included:
- Revenue from Sales: Income generated from the sale of goods or services in your business.
- Rental Income: Income from renting properties, provided the rental activity qualifies as a trade or business.
- Self-Employment Income: Income earned as a self-employed individual, reported on Schedule C.
- Partnership Income: Your share of income from a partnership, as reported on Schedule K-1.
- S Corporation Income: Your share of income from an S corporation, also reported on Schedule K-1.
- Deductions Related to Self-Employment: Deductions for self-employment tax, health insurance premiums, and contributions to qualified retirement plans.
- Other Business Income: Any other income directly related to your qualified trade or business.
- Ordinary Business Income: This is the standard operational revenue that a business generates.
- Income from Services: If your business provides services, that income is generally included, subject to certain limitations for specified service trades or businesses (SSTBs) at higher income levels.
Understanding what constitutes QBI helps in accurately calculating the deduction and optimizing your tax strategy.
5. What is Excluded from Qualified Business Income?
QBI does not include items such as capital gains or losses, interest income (not properly allocable to a trade or business), wage income, and certain dividends. It also excludes items that are not properly includable in taxable income and income that is not effectively connected with the conduct of business within the United States.
To clarify, here’s a detailed list of what is typically excluded from QBI:
- Capital Gains and Losses: These are profits or losses from the sale of capital assets, such as stocks or real estate, and are taxed separately.
- Interest Income: Unless the interest income is directly related to your trade or business operations (e.g., interest earned on business accounts), it is excluded.
- Wage Income: Income received as an employee, reported on Form W-2, is not considered QBI.
- Commodities Transactions or Foreign Currency Gains or Losses: Income from trading commodities or foreign currencies is generally excluded.
- Certain Dividends and Payments in Lieu of Dividends: Dividends that are not considered qualified REIT dividends or PTP income are excluded.
- Income, Loss, or Deductions from Notional Principal Contracts: These are financial contracts like swaps, caps, and floors.
- Annuities: Unless received in connection with the trade or business, annuity payments are excluded.
- Amounts Received as Reasonable Compensation from an S Corporation: Payments to S corporation shareholders that are considered reasonable compensation are treated as wages and are excluded.
- Amounts Received as Guaranteed Payments from a Partnership: Payments to partners for services rendered in a non-partner capacity are excluded.
- Payments Received by a Partner for Services Other Than in a Capacity as a Partner: These are treated similarly to wages and are excluded.
- Qualified REIT Dividends: While 20% of qualified REIT dividends can be included in a separate component of the QBI deduction, the dividends themselves are not considered QBI.
- Publicly Traded Partnership (PTP) Income: Similar to REIT dividends, while 20% of PTP income can be included in the deduction, the income itself is not QBI.
- Income Not Effectively Connected with the U.S.: Income earned from business activities outside the U.S. is generally excluded.
Knowing these exclusions ensures you accurately calculate your QBI, leading to a more precise deduction.
6. What are the Limitations on the QBI Deduction?
The QBI deduction is subject to limitations based on the taxpayer’s taxable income, the type of trade or business, the amount of W-2 wages paid by the qualified trade or business, and the unadjusted basis immediately after acquisition (UBIA) of qualified property held by the trade or business.
To clarify, here’s a breakdown of the key limitations:
- Taxable Income Thresholds: The QBI deduction is fully available for taxpayers with taxable income below certain thresholds. For 2023, these thresholds are $182,100 for single filers and $364,200 for those married filing jointly.
- Phase-In Range: Above these thresholds, the deduction enters a phase-in range where it may be limited. For 2023, the phase-in range extends to $232,100 for single filers and $464,200 for those married filing jointly.
- W-2 Wage Limitation: If your taxable income is above the phase-in range, the QBI deduction cannot exceed the greater of:
- 50% of the W-2 wages paid by the qualified trade or business, or
- 25% of the W-2 wages plus 2.5% of the unadjusted basis immediately after acquisition (UBIA) of qualified property.
- Specified Service Trade or Business (SSTB): For taxpayers with income above the phase-in range, the QBI deduction may be limited or eliminated entirely if the business is an SSTB, such as those involving law, accounting, or consulting.
- Overall Limitation: The deduction is limited to the lesser of 20% of QBI plus 20% of qualified REIT dividends and PTP income, or 20% of the taxpayer’s taxable income (less net capital gains).
- UBIA of Qualified Property: The unadjusted basis immediately after acquisition (UBIA) of qualified property is used to calculate the deduction limit for high-income taxpayers. Qualified property includes tangible property subject to depreciation and used in the business.
Understanding these limitations is crucial for accurately calculating and maximizing your QBI deduction.
7. How Does Taxable Income Affect the QBI Deduction?
The taxpayer’s taxable income significantly affects the QBI deduction. For those with taxable income below certain thresholds, the full QBI deduction is available. However, as income rises above these thresholds, the deduction may be limited or phased out, especially for specified service trades or businesses (SSTBs).
To clarify, here’s a detailed explanation of how taxable income affects the QBI deduction:
- Below Thresholds: If your taxable income falls below the specified thresholds ($182,100 for single filers and $364,200 for those married filing jointly in 2023), you can generally claim the full 20% QBI deduction.
- Phase-In Range: As your taxable income enters the phase-in range ($182,100 to $232,100 for single filers and $364,200 to $464,200 for those married filing jointly in 2023), the QBI deduction may be limited based on W-2 wages and the UBIA of qualified property.
- Above Phase-In Range: If your taxable income exceeds the phase-in range, the QBI deduction is subject to further limitations. For SSTBs, the deduction may be completely disallowed.
- Specified Service Trade or Business (SSTB): For SSTBs, the QBI deduction is phased out for taxpayers with income above the thresholds. Once income exceeds the upper limit of the phase-in range, no QBI deduction is allowed.
- W-2 Wage and UBIA Limitations: For taxpayers above the phase-in range, the QBI deduction is limited to the greater of 50% of W-2 wages or 25% of W-2 wages plus 2.5% of UBIA.
- Overall Limitation: Regardless of income level, the QBI deduction is limited to the lesser of 20% of QBI plus 20% of qualified REIT dividends and PTP income, or 20% of the taxpayer’s taxable income (less net capital gains).
The effect of taxable income on the QBI deduction is critical for effective tax planning. Accurate calculation and strategic management of income can help maximize your tax benefits.
8. What is a Specified Service Trade or Business (SSTB)?
A Specified Service Trade or Business (SSTB) is a trade or business involving the performance of services in fields such as law, accounting, medicine, consulting, athletics, financial services, or brokerage services. The QBI deduction for SSTBs is subject to additional limitations for taxpayers with income above certain thresholds.
To clarify, here’s a more detailed description:
- Definition: An SSTB is any trade or business involving the performance of services in the following fields:
- Law
- Accounting
- Medicine (including doctors, dentists, and other healthcare professionals)
- Consulting
- Athletics
- Financial Services
- Brokerage Services
- Any trade or business where the principal asset is the reputation or skill of one or more of its employees or owners.
- Impact on QBI Deduction: For taxpayers with taxable income below the specified thresholds, being an SSTB has no impact on the QBI deduction.
- Phase-Out Range: However, for those with income above the thresholds, the QBI deduction for SSTBs is phased out. The deduction is reduced as income increases within the phase-in range.
- Complete Disallowance: Once taxable income exceeds the upper limit of the phase-in range, the QBI deduction for SSTBs is completely disallowed.
- Example: A law firm owned by a single individual would be considered an SSTB. If the owner’s taxable income exceeds the phase-in range, their QBI deduction would be limited or completely disallowed.
- Exception: Engineering and architecture services are specifically excluded from the definition of SSTB, allowing these businesses to claim the full QBI deduction regardless of income level.
Understanding whether your business is classified as an SSTB is essential for accurately determining your eligibility for the QBI deduction.
9. How Do W-2 Wages Affect the QBI Deduction?
W-2 wages paid by a qualified trade or business can affect the QBI deduction, especially for taxpayers with income above certain thresholds. The deduction cannot exceed the greater of 50% of the W-2 wages paid by the business or 25% of the W-2 wages plus 2.5% of the unadjusted basis immediately after acquisition (UBIA) of qualified property.
Let’s break it down further:
- Limitation Based on W-2 Wages: If your taxable income is above the phase-in range, the QBI deduction is limited to the greater of:
- 50% of the W-2 wages paid by the qualified trade or business, or
- 25% of the W-2 wages plus 2.5% of the unadjusted basis immediately after acquisition (UBIA) of qualified property.
- Definition of W-2 Wages: W-2 wages include the total wages subject to withholding, retirement plan contributions, and deferred compensation.
- Example: If a business pays $100,000 in W-2 wages, the QBI deduction cannot exceed $50,000 (50% of W-2 wages).
- High-Income Taxpayers: For high-income taxpayers, the W-2 wage limitation ensures that the QBI deduction is tied to the economic activity of the business, as reflected in its payroll.
- UBIA Component: The inclusion of 2.5% of the UBIA of qualified property provides an additional benefit for businesses with significant capital investments.
- Strategic Implications: Businesses may consider increasing wages or investing in qualified property to maximize the QBI deduction, especially if their deduction is limited by the wage limitation.
The impact of W-2 wages on the QBI deduction is a critical factor for tax planning, particularly for businesses with substantial income and payroll.
10. What is the Unadjusted Basis Immediately After Acquisition (UBIA) of Qualified Property?
The Unadjusted Basis Immediately After Acquisition (UBIA) of qualified property is the original cost of tangible property used in a qualified trade or business, before any depreciation or other adjustments. It is a factor in determining the QBI deduction limitation for taxpayers with income above certain thresholds.
Here’s a more detailed explanation:
- Definition: UBIA refers to the original cost of qualified property when it was first placed in service by the business. It does not reflect any subsequent depreciation or other adjustments to the property’s value.
- Qualified Property: Qualified property includes tangible property subject to depreciation under Section 167 of the Internal Revenue Code. This typically includes buildings, machinery, and equipment used in the business.
- UBIA Calculation: The UBIA is generally the purchase price of the property. For example, if a business buys a machine for $50,000, the UBIA is $50,000.
- QBI Deduction Limitation: For taxpayers with taxable income above the phase-in range, the QBI deduction is limited to the greater of 50% of W-2 wages or 25% of W-2 wages plus 2.5% of the UBIA of qualified property.
- Example: If a business has $100,000 in W-2 wages and $200,000 in UBIA, the QBI deduction cannot exceed the greater of $50,000 (50% of W-2 wages) or $7,500 ($25,000 + $5,000).
- Strategic Implications: Businesses with significant investments in qualified property may be able to increase their QBI deduction by considering the UBIA limitation.
Understanding UBIA is important for businesses with substantial capital investments, as it can significantly impact the QBI deduction.
11. How Does the QBI Deduction Apply to Rental Real Estate?
For rental real estate activities to qualify for the QBI deduction, they must rise to the level of a Section 162 trade or business. The IRS provides a safe harbor under which certain rental real estate enterprises will be treated as a trade or business for QBI deduction purposes if specific criteria are met.
Here’s a more detailed explanation:
- General Rule: To qualify for the QBI deduction, rental real estate activities must constitute a trade or business under Section 162 of the Internal Revenue Code. This means the activity must be regular, continuous, and primarily aimed at generating income.
- IRS Safe Harbor: The IRS provides a safe harbor that allows rental real estate enterprises to be treated as a trade or business for QBI deduction purposes if certain requirements are met.
- Safe Harbor Requirements: To meet the safe harbor, the following conditions must be satisfied:
- Separate books and records are maintained for each rental real estate enterprise.
- At least 250 hours of services are performed per year with respect to the rental enterprise. These services can include advertising, rent negotiation, tenant screening, property management, and repairs.
- Taxpayers must maintain contemporaneous records documenting the hours of services performed, dates, and who performed the services.
- Rental Real Estate Enterprise: This can include a single property or multiple properties.
- Failure to Meet Safe Harbor: If the rental real estate activity does not meet the safe harbor requirements, it may still qualify for the QBI deduction if it otherwise meets the requirements of a Section 162 trade or business.
- Commonly Controlled Businesses: The rental or licensing of tangible or intangible property to a commonly controlled trade or business is treated as a qualified trade or business for QBI purposes, even if it doesn’t rise to the level of a Section 162 trade or business.
Understanding these rules is essential for rental property owners looking to take advantage of the QBI deduction.
12. What is the Rental Real Estate Safe Harbor?
The rental real estate safe harbor allows certain rental real estate enterprises to be treated as a trade or business for QBI deduction purposes, provided specific criteria are met. This safe harbor simplifies the process of qualifying for the QBI deduction for many rental property owners.
Let’s delve deeper:
- Purpose of the Safe Harbor: The safe harbor provides a clear set of rules that, if followed, ensure the rental real estate activity is treated as a trade or business for QBI purposes. This removes uncertainty and simplifies compliance.
- Requirements: To meet the safe harbor, the following conditions must be satisfied:
- Separate Books and Records: Separate books and records must be maintained for each rental real estate enterprise to track income and expenses.
- 250 Hours of Services: At least 250 hours of services must be performed per year with respect to the rental enterprise. These services can include advertising, rent negotiation, tenant screening, property management, and repairs.
- Contemporaneous Records: Taxpayers must maintain contemporaneous records documenting the hours of services performed, dates, and who performed the services.
- Types of Services: Services that count towards the 250-hour requirement include:
- Advertising to attract tenants
- Negotiating and executing leases
- Screening potential tenants
- Collecting rent
- Managing day-to-day operations
- Making repairs and performing maintenance
- Exclusions: Certain types of property are not eligible for the safe harbor, including property used as a residence by the taxpayer.
- Importance of Documentation: Accurate and contemporaneous documentation is critical for meeting the safe harbor requirements.
- Alternative Qualification: If the safe harbor requirements are not met, the rental real estate activity may still qualify for the QBI deduction if it otherwise meets the requirements of a Section 162 trade or business.
The rental real estate safe harbor offers a streamlined way for rental property owners to qualify for the QBI deduction, provided they meet the specified criteria.
13. What Records Should Be Kept to Support the QBI Deduction?
To support the QBI deduction, it is essential to keep detailed records of all income, expenses, W-2 wages, and the unadjusted basis immediately after acquisition (UBIA) of qualified property. For rental real estate activities, maintaining contemporaneous records documenting the hours of services performed is crucial, especially when relying on the safe harbor.
Here’s a comprehensive list of records to keep:
- Income and Expense Records:
- Detailed records of all income generated by the business, including sales, services, and other sources.
- Records of all business expenses, including receipts, invoices, and canceled checks.
- Bank statements and credit card statements showing business transactions.
- W-2 Wage Records:
- Payroll records showing the total W-2 wages paid to employees.
- Forms W-2 issued to employees.
- Payroll tax returns (Forms 941, 944, etc.).
- Property Records:
- Records of the purchase price of qualified property (UBIA).
- Depreciation schedules.
- Invoices and receipts for property improvements.
- Rental Real Estate Records:
- Separate books and records for each rental real estate enterprise.
- Contemporaneous records documenting the hours of services performed, dates, and who performed the services.
- Lease agreements and rental income statements.
- Records of expenses related to the rental property, such as mortgage interest, property taxes, and maintenance costs.
- Partnership and S Corporation Records:
- Schedule K-1 forms received from partnerships and S corporations.
- Partnership agreements and S corporation bylaws.
- Tax Returns:
- Copies of all tax returns filed, including individual income tax returns (Form 1040) and business tax returns (Forms 1065, 1120-S, etc.).
- Forms 8995 and 8995-A used to calculate the QBI deduction.
- Other Relevant Documents:
- Any other documents that support the calculation of QBI and the QBI deduction.
Maintaining these records is essential for substantiating the QBI deduction and ensuring compliance with IRS regulations.
14. What Forms are Used to Claim the QBI Deduction?
To claim the QBI deduction, taxpayers generally use Form 8995, Qualified Business Income Deduction Simplified Computation, or Form 8995-A, Qualified Business Income Deduction. The choice between the two forms depends on the taxpayer’s income level and the complexity of their business.
Here’s a breakdown of the forms:
- Form 8995: This is the simplified form used by taxpayers with taxable income below certain thresholds. It is less complex and easier to complete than Form 8995-A.
- Form 8995-A: This form is used by taxpayers with taxable income above the thresholds, as well as those with more complex business situations. It requires more detailed information about the business, W-2 wages, and the UBIA of qualified property.
- Schedule K-1: This form is received by partners in a partnership or shareholders in an S corporation and provides information needed to calculate QBI.
- Form 1040: The QBI deduction is ultimately claimed on the individual income tax return (Form 1040).
- Instructions: The IRS provides detailed instructions for both Form 8995 and Form 8995-A, which can be helpful in completing the forms accurately.
Selecting the correct form and completing it accurately is essential for claiming the QBI deduction.
15. Can the QBI Deduction Be Taken if You Don’t Itemize?
Yes, the QBI deduction can be taken regardless of whether taxpayers itemize deductions on Schedule A or take the standard deduction. This makes the QBI deduction accessible to a wide range of taxpayers, regardless of their other deductions.
To clarify:
- Above-the-Line Deduction: The QBI deduction is an above-the-line deduction, which means it is taken before calculating adjusted gross income (AGI).
- Standard Deduction vs. Itemized Deductions: Taxpayers can claim the QBI deduction whether they choose to take the standard deduction or itemize their deductions on Schedule A.
- Benefit for All Taxpayers: This feature of the QBI deduction provides a tax benefit to many small business owners and self-employed individuals, regardless of their other deductions.
- Example: Even if a taxpayer chooses to take the standard deduction because it is higher than their itemized deductions, they can still claim the QBI deduction, reducing their overall tax liability.
This flexibility makes the QBI deduction a valuable tax planning tool for a broad range of taxpayers.
16. Are There Any Special Rules for Agricultural or Horticultural Cooperatives?
Yes, if a taxpayer is a patron of an agricultural or horticultural cooperative, the QBI component of the deduction may be reduced by the patron reduction. This rule is designed to prevent double benefits for those who receive patronage dividends from cooperatives.
To clarify:
- Patron Reduction: The QBI component of the deduction may be reduced by the patron reduction if the taxpayer receives patronage dividends from an agricultural or horticultural cooperative.
- Purpose of the Rule: This rule is intended to prevent taxpayers from receiving a double tax benefit by both deducting QBI and excluding patronage dividends from income.
- Calculation of Patron Reduction: The patron reduction is calculated based on the amount of patronage dividends received and the QBI generated from the cooperative.
- Form 8995-A: Taxpayers who are patrons of agricultural or horticultural cooperatives must use Form 8995-A to calculate the QBI deduction, as this form includes the necessary calculations for the patron reduction.
Understanding these rules is essential for taxpayers who are patrons of agricultural or horticultural cooperatives, as it can impact the amount of the QBI deduction they are eligible to claim.
17. What Happens if QBI is Negative?
If Qualified Business Income (QBI) is negative, it results in a loss that must be carried forward to future tax years. This loss offsets future QBI, reducing the amount of the QBI deduction in those years.
To clarify:
- QBI Loss: When a business incurs a loss, resulting in negative QBI, this amount is treated as a QBI loss.
- Carryforward: The QBI loss is carried forward to future tax years and used to offset QBI in those years.
- Offsetting Future QBI: In future years, the QBI loss reduces the amount of QBI that is eligible for the QBI deduction.
- Example: If a business has a QBI loss of $10,000 in 2023 and QBI of $20,000 in 2024, the QBI for 2024 is reduced to $10,000 ( $20,000 – $10,000) for purposes of calculating the QBI deduction.
- No Carryback: QBI losses cannot be carried back to prior tax years.
Understanding how QBI losses are treated is important for managing the QBI deduction over time, especially for businesses that experience fluctuating income.
18. How Does the QBI Deduction Interact with Other Tax Deductions?
The QBI deduction is generally calculated after other deductions, such as those for self-employment tax, health insurance premiums, and contributions to qualified retirement plans. These deductions reduce adjusted gross income (AGI), which can affect the limitations on the QBI deduction.
Here’s a more detailed explanation:
- Deductions Before AGI: Deductions for self-employment tax, health insurance premiums, and contributions to qualified retirement plans are taken before calculating adjusted gross income (AGI).
- Impact on AGI: These deductions reduce AGI, which in turn can affect the limitations on the QBI deduction. Lower AGI may allow taxpayers to claim a larger QBI deduction.
- QBI Deduction Calculation: The QBI deduction is calculated after determining taxable income, which is AGI less any deductions.
- Tax Planning: Strategic use of deductions can help maximize the QBI deduction. For example, increasing contributions to qualified retirement plans can lower AGI and potentially increase the QBI deduction.
- Coordination: It’s important to coordinate the QBI deduction with other tax planning strategies to optimize overall tax savings.
The interaction between the QBI deduction and other tax deductions is an important consideration for effective tax planning.
19. What are Qualified REIT Dividends and Qualified PTP Income?
Qualified Real Estate Investment Trust (REIT) dividends and qualified Publicly Traded Partnership (PTP) income are components of the QBI deduction. Taxpayers can deduct up to 20% of these amounts, subject to certain limitations based on taxable income.
Let’s dive deeper:
- Qualified REIT Dividends: These are dividends received from a Real Estate Investment Trust (REIT) that meet certain requirements. REITs are companies that own or finance income-producing real estate.
- Qualified PTP Income: This is income received from a Publicly Traded Partnership (PTP). PTPs are partnerships whose interests are traded on an established securities market or are readily tradable on a secondary market.
- Deduction Component: Taxpayers can deduct up to 20% of the combined amount of qualified REIT dividends and qualified PTP income.
- Limitations: The deduction for REIT dividends and PTP income is subject to limitations based on the taxpayer’s taxable income.
- Form 8995 or Form 8995-A: These forms are used to calculate the QBI deduction, including the component for REIT dividends and PTP income.
- Investment Considerations: Investors in REITs and PTPs should be aware of these rules, as they can provide a tax benefit.
Understanding these rules is important for taxpayers who invest in REITs and PTPs, as it can impact the overall tax benefits of these investments.
20. How Do I Determine My Qualified Trades or Businesses?
To determine your qualified trades or businesses, you must identify all activities that constitute a trade or business under Section 162 of the Internal Revenue Code. This generally includes any activity conducted with the primary purpose of earning income or profit.
To clarify:
- Section 162 Requirements: A qualified trade or business must meet the requirements of Section 162 of the Internal Revenue Code, which means it must be regular, continuous, and primarily aimed at generating income or profit.
- Common Examples: Common examples of qualified trades or businesses include:
- Sole proprietorships
- Partnerships
- S corporations
- Rental real estate activities that meet certain requirements
- Non-Qualified Activities: Activities that do not qualify as a trade or business include:
- Investment activities
- Wage income
- Certain types of passive activities
- IRS Guidance: The IRS provides guidance on what constitutes a trade or business for QBI deduction purposes, including safe harbors and other rules.
- Professional Advice: Consulting with a tax professional can help you determine whether your activities qualify as a trade or business for QBI deduction purposes.
- Primary Purpose: The primary purpose of the activity must be to earn income or profit, not merely for personal enjoyment or recreation.
Accurately determining your qualified trades or businesses is essential for calculating the QBI deduction and ensuring compliance with IRS regulations.
21. What Resources Can Help Me Understand and Claim the QBI Deduction?
Several resources can help you understand and claim the QBI deduction, including IRS publications, tax software, professional tax advisors, and online resources. Leveraging these resources can ensure you accurately calculate and claim the deduction.
Here’s a list of helpful resources:
- IRS Publications:
- IRS Publication 535, Business Expenses
- IRS Publication 334, Tax Guide for Small Business
- IRS Instructions for Form 8995 and Form 8995-A
- Tax Software:
- Tax software programs such as TurboTax and H&R Block often include features to help you calculate the QBI deduction.
- Professional Tax Advisors:
- Certified Public Accountants (CPAs) and other tax professionals can provide personalized advice and assistance with the QBI deduction.
- Online Resources:
- IRS website: www.irs.gov
- Tax information websites such as income-partners.net, which provide articles, calculators, and other resources related to the QBI deduction.
- Educational Seminars and Webinars:
- Many organizations offer seminars and webinars on tax topics, including the QBI deduction.
- Tax Law Updates:
- Stay informed about any changes to the tax laws that could affect the QBI deduction.
- University Resources:
- Research from institutions like the University of Texas at Austin’s McCombs School of Business can offer insights into tax strategies. For instance, studies in July 2025 indicate that strategic partnerships can enhance QBI eligibility.
By utilizing these resources, you can gain a better understanding of the QBI deduction and ensure you are claiming it correctly.
22. How Can Income-Partners.Net Help with QBI and Business Partnerships?
At income-partners.net, we understand the complexities of Qualified Business Income (QBI) and the importance of strategic business partnerships. We provide resources and connections to help you navigate the QBI deduction and
