What Is Deduction For Qualified Business Income (QBI Deduction)?

The deduction for qualified business income, also known as the QBI deduction or Section 199A deduction, allows eligible taxpayers to deduct up to 20% of their qualified business income (QBI), plus 20% of qualified Real Estate Investment Trust (REIT) dividends and qualified Publicly Traded Partnership (PTP) income. At income-partners.net, we will explore how this deduction can help you boost your bottom line and optimize your financial strategy through strategic partnerships. Let’s dive into the nuances of QBI, explore real-world scenarios, and discover how to unlock the full potential of this valuable tax benefit with business collaborations, partnership ventures, and income enhancement.

1. What Is Qualified Business Income (QBI) Deduction?

The Qualified Business Income (QBI) deduction, established under Section 199A, allows eligible self-employed and small-business owners to deduct up to 20% of their qualified business income (QBI). This deduction is available to eligible taxpayers, regardless of whether they itemize deductions on Schedule A or take the standard deduction, for tax years beginning after December 31, 2017, and ending on or before December 31, 2025.

To elaborate, the QBI deduction is designed to provide tax relief to small business owners and self-employed individuals, leveling the playing field with larger corporations that already benefit from lower corporate tax rates. It’s a significant opportunity to reduce your tax liability and reinvest in your business.

1.1. Who Can Claim the QBI Deduction?

The QBI deduction is primarily aimed at owners of pass-through entities. Pass-through entities include:

• Sole Proprietorships: Businesses owned and run by one person where there is no legal distinction between the owner and the business.
• Partnerships: Businesses owned and operated by two or more individuals.
• S Corporations: Corporations that pass their income, losses, deductions, and credits through to their shareholders for federal income tax purposes.
• Limited Liability Companies (LLCs): Business structures that offer the limited liability of a corporation and the pass-through taxation of a partnership or sole proprietorship.
• Trusts and Estates: Certain trusts and estates that operate a qualified business may also be eligible.

1.2. What Are the Key Components of the QBI Deduction?

The QBI deduction has two primary components:

1. QBI Component:
   • This is the core of the deduction. It allows eligible taxpayers to deduct up to 20% of their qualified business income (QBI) from a domestic business.
   • The business must be operated as a sole proprietorship or through a partnership, S corporation, trust, or estate.
   • The QBI Component 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.
   • It may also be reduced by the patron reduction if the taxpayer is a patron of an agricultural or horticultural cooperative.
2. REIT/PTP Component:
   • This component allows taxpayers to deduct 20% of qualified REIT dividends and qualified PTP income.
   • Unlike the QBI component, this part of the deduction is not limited by W-2 wages or the UBIA of qualified property.
   • However, the amount of PTP income that qualifies may be limited depending on the type of the PTP’s trade or business.

The deduction is limited to the lesser of the QBI component plus the REIT/PTP component, or 20% of the taxpayer’s taxable income minus net capital gain.

1.3. How Is QBI Defined?

Qualified Business Income (QBI) is the net amount of qualified items of income, gain, deduction, and loss from any qualified trade or business. It includes income from partnerships, S corporations, sole proprietorships, and certain trusts. Generally, this includes items such as:

• Revenue from sales of goods or services
• Rental income
• Other business income

However, QBI does not include certain items, such as:

• Capital gains or losses
• Interest income not properly allocable to a trade or business
• Wage income
• Income that is not effectively connected with the conduct of business within the United States
• Commodities transactions or foreign currency gains or losses
• Certain dividends and payments in lieu of dividends
• Income, loss, or deductions from notional principal contracts
• Annuities, unless received in connection with the trade or business
• Amounts received as reasonable compensation from an S corporation
• Amounts received as guaranteed payments from a partnership
• Payments received by a partner for services other than in a capacity as a partner
• Qualified REIT dividends
• PTP income
• The deductible part of self-employment tax
• Self-employed health insurance
• Deductions for contributions to qualified retirement plans (e.g., SEP, SIMPLE and qualified plan deductions)

Understanding what constitutes QBI is crucial for accurately calculating the deduction.

1.4. What Are the Limitations Based on Taxable Income?

The QBI deduction is subject to limitations based on the taxpayer’s taxable income. These limitations are designed to phase out the deduction for higher-income taxpayers. For 2023, the thresholds are:

• Single Filers:
  • Below $182,100: Full deduction allowed.
  • Between $182,100 and $232,100: Deduction may be limited.
  • Above $232,100: Deduction may be fully or partially disallowed, depending on the type of business.
• Married Filing Jointly:
  • Below $364,200: Full deduction allowed.
  • Between $364,200 and $464,200: Deduction may be limited.
  • Above $464,200: Deduction may be fully or partially disallowed, depending on the type of business.

For taxpayers with income above these thresholds, the deduction may be limited based on the amount of W-2 wages paid by the business and the unadjusted basis immediately after acquisition (UBIA) of qualified property.

1.5. What Is the Significance of W-2 Wages and UBIA?

For taxpayers with income above the thresholds, the QBI deduction may be limited based on W-2 wages and UBIA.

• W-2 Wages: The amount of wages paid to employees by the qualified trade or business. Higher W-2 wages can increase the allowable deduction for taxpayers above the income thresholds.
• UBIA (Unadjusted Basis Immediately After Acquisition): The original cost of qualified property used in the business. Qualified property includes tangible property subject to depreciation. A higher UBIA can also increase the allowable deduction for taxpayers above the income thresholds.

The deduction generally 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 UBIA of qualified property.

These limitations are complex and require careful calculation to determine the allowable deduction.

1.6. How Does the QBI Deduction Apply to Specified Service Trades or Businesses (SSTBs)?

A specified service trade or business (SSTB) is defined as any trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset is the reputation or skill of one or more of its employees or owners.

For taxpayers with income above the thresholds, the QBI deduction is more restricted for SSTBs. The deduction may be reduced or eliminated entirely, depending on the taxpayer’s income.

1.7. Can Rental Real Estate Qualify for the QBI Deduction?

Yes, rental real estate can qualify for the QBI deduction under certain conditions. The IRS provides a safe harbor that allows rental real estate to be treated as a trade or business for purposes of the QBI deduction if certain criteria are met.

Under the safe harbor, a rental real estate enterprise will be treated as a trade or business if:

• Separate books and records are maintained for each rental real estate enterprise.
• 250 or more hours of services are performed per year with respect to the rental enterprise.
• Taxpayers keep contemporaneous records documenting the services performed.

An interest in rental real estate that does not meet the requirements of the safe harbor may still be treated as a trade or business for purposes of the QBI deduction if it otherwise is a section 162 trade or business. In addition, the rental or licensing of tangible or intangible property that does not rise to the level of a section 162 trade or business is nevertheless treated as a qualified trade or business for purposes of section 199A if the rental or licensing of property is to a commonly controlled trade or business operated by the individual or a passthrough entity.

1.8. What Are the Common Mistakes to Avoid When Claiming the QBI Deduction?

Several common mistakes can lead to errors or missed opportunities when claiming the QBI deduction:

• Miscalculating QBI: Accurately determining QBI is critical. Failing to exclude items that do not qualify as QBI or including items that should be excluded can lead to inaccuracies.
• Incorrectly Applying Income Limitations: The income limitations can be complex. Failing to properly apply these limitations can result in an overstatement or understatement of the deduction.
• Not Meeting the Requirements for the Rental Real Estate Safe Harbor: If claiming the deduction for rental real estate, it’s essential to meet the requirements of the safe harbor or otherwise qualify as a section 162 trade or business.
• Failing to Consider W-2 Wages and UBIA: For taxpayers with income above the thresholds, failing to consider W-2 wages and UBIA can result in an incorrect calculation of the deduction.
• Not Keeping Adequate Records: Keeping thorough and accurate records is essential for substantiating the QBI deduction.

1.9. How Can Partnerships Enhance the QBI Deduction?

Partnerships can significantly enhance the QBI deduction by leveraging the collective resources, expertise, and diverse income streams of their partners. Strategic alliances can lead to increased profitability, which directly impacts the QBI available for deduction.

Pooling Resources for W-2 Wages and UBIA

Partnerships can pool their resources to increase W-2 wages and UBIA, which are critical factors in maximizing the QBI deduction for high-income taxpayers. By combining their financial resources, partnerships can afford to hire more employees (increasing W-2 wages) and invest in qualified property (increasing UBIA), thereby increasing the allowable deduction.

Strategic Business Alliances

Forming strategic business alliances allows partnerships to diversify their income streams and potentially increase overall QBI. By collaborating with businesses in complementary industries, partnerships can tap into new markets, access innovative technologies, and expand their customer base. This leads to higher revenues and, consequently, a larger QBI deduction.

Operational Efficiencies

Partnerships can streamline their operations and reduce costs by sharing resources, expertise, and best practices. For instance, partnerships can consolidate administrative functions, marketing efforts, and supply chain management to achieve economies of scale. These efficiencies result in higher profitability and a greater QBI deduction.

Collaborative Innovation

Partnerships can foster collaborative innovation by pooling the unique skills and perspectives of their partners. By engaging in joint research and development projects, partnerships can create innovative products and services that generate significant revenue. These collaborative efforts not only drive business growth but also enhance the QBI deduction.

1.10. Where Can Taxpayers Find More Information and Resources on the QBI Deduction?

Taxpayers can find more information and resources on the QBI deduction from the following sources:

• Internal Revenue Service (IRS): The IRS website provides detailed information on the QBI deduction, including forms, instructions, publications, and FAQs.
• Tax Professionals: Consulting with a qualified tax professional can provide personalized guidance on the QBI deduction and help taxpayers navigate the complex rules and limitations.
• Professional Organizations: Organizations such as the American Institute of CPAs (AICPA) and the National Association of Tax Professionals (NATP) offer resources and educational materials on the QBI deduction.
• Online Tax Resources: Websites such as income-partners.net provide valuable information, insights, and tools to help taxpayers understand and maximize the QBI deduction.

2. What Are the Search Intents for “What Is Deduction For Qualified Business Income?”

Understanding the search intents behind the query “What Is Deduction For Qualified Business Income” is crucial for providing comprehensive and relevant information. Here are five key search intents:

1. Informational: Users want to understand the basic definition and concept of the QBI deduction.
2. Eligibility: Users want to determine if they are eligible for the QBI deduction based on their business structure and income level.
3. Calculation: Users need to know how to calculate the QBI deduction, including understanding the components, limitations, and required forms.
4. Specific Scenarios: Users are looking for guidance on how the QBI deduction applies to specific situations, such as rental real estate, specified service trades or businesses, or partnerships.
5. Optimization: Users want to find strategies to maximize their QBI deduction, including understanding W-2 wages, UBIA, and tax planning opportunities.

3. How Is the QBI Component Calculated?

The QBI component is a critical part of the overall QBI deduction, allowing eligible taxpayers to deduct up to 20% of their qualified business income from a domestic business. This section breaks down the calculation process step by step.

3.1. Step 1: Determine Your Qualified Business Income (QBI)

The first step in calculating the QBI component is to determine your qualified business income (QBI). As previously mentioned, QBI is the net amount of qualified items of income, gain, deduction, and loss from any qualified trade or business. This includes income from partnerships, S corporations, sole proprietorships, and certain trusts.

To accurately determine your QBI, consider the following:

• Include revenue from sales of goods or services, rental income, and other business income.
• Exclude capital gains or losses, interest income not properly allocable to a trade or business, wage income, and other items that do not qualify as QBI.
• Ensure that all items included in QBI are properly includable in taxable income and effectively connected with the conduct of business within the United States.

3.2. Step 2: Calculate 20% of Your QBI

Once you have determined your QBI, the next step is to calculate 20% of that amount. This is a straightforward calculation:

20% of QBI = 0.20 x QBI

For example, if your QBI is $100,000, then 20% of your QBI would be $20,000.

3.3. Step 3: Determine Your Taxable Income

The QBI deduction is subject to limitations based on the taxpayer’s taxable income. Therefore, you need to determine your taxable income for the tax year. Taxable income is your adjusted gross income (AGI) less any deductions, such as the standard deduction or itemized deductions.

3.4. Step 4: Calculate 20% of Your Taxable Income

Next, calculate 20% of your taxable income. This is another straightforward calculation:

20% of Taxable Income = 0.20 x Taxable Income

For example, if your taxable income is $80,000, then 20% of your taxable income would be $16,000.

3.5. Step 5: Apply the Taxable Income Limitations

The QBI deduction is subject to limitations based on your taxable income. For taxpayers with income below certain thresholds, the deduction is generally not limited. However, for taxpayers with income above these thresholds, the deduction may be limited based on W-2 wages and UBIA.

For 2023, the thresholds are:

• Single Filers:
  • Below $182,100: Full deduction allowed.
  • Between $182,100 and $232,100: Deduction may be limited.
  • Above $232,100: Deduction may be fully or partially disallowed, depending on the type of business.
• Married Filing Jointly:
  • Below $364,200: Full deduction allowed.
  • Between $364,200 and $464,200: Deduction may be limited.
  • Above $464,200: Deduction may be fully or partially disallowed, depending on the type of business.

If your taxable income is above these thresholds, you will need to consider the W-2 wage and UBIA limitations.

3.6. Step 6: Consider W-2 Wages and UBIA Limitations (If Applicable)

For taxpayers with income above the thresholds, the QBI deduction may be limited based on W-2 wages and UBIA. The deduction generally 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 UBIA of qualified property.

To apply these limitations, you will need to determine the amount of W-2 wages paid by your qualified trade or business and the unadjusted basis immediately after acquisition (UBIA) of qualified property held by the trade or business.

Example:

Let’s say you are a single filer with taxable income of $250,000. Your QBI is $120,000, and your business paid W-2 wages of $40,000 and has a UBIA of $100,000.

1. 20% of QBI: 0.20 x $120,000 = $24,000
2. 50% of W-2 Wages: 0.50 x $40,000 = $20,000
3. 25% of W-2 Wages + 2.5% of UBIA: (0.25 x $40,000) + (0.025 x $100,000) = $10,000 + $2,500 = $12,500

In this case, the deduction cannot exceed the greater of $20,000 or $12,500, which is $20,000. Therefore, your QBI deduction would be limited to $20,000.

3.7. Step 7: Determine the QBI Component

The QBI component is the lesser of 20% of your QBI or 20% of your taxable income, subject to the W-2 wage and UBIA limitations (if applicable).

Using the previous example, let’s say your taxable income is $250,000, and 20% of your taxable income is $50,000. Your QBI is $120,000, and 20% of your QBI is $24,000. However, due to the W-2 wage and UBIA limitations, your deduction is limited to $20,000.

In this case, the QBI component would be $20,000, as it is the lesser of 20% of your QBI, 20% of your taxable income, and the W-2 wage and UBIA limitations.

3.8. Example Calculation

Here’s a comprehensive example to illustrate the calculation of the QBI component:

Facts:

• Filer: Married Filing Jointly
• Taxable Income: $400,000
• QBI: $200,000
• W-2 Wages: $80,000
• UBIA: $200,000

Calculations:

1. 20% of QBI: 0.20 x $200,000 = $40,000
2. 20% of Taxable Income: 0.20 x $400,000 = $80,000
3. 50% of W-2 Wages: 0.50 x $80,000 = $40,000
4. 25% of W-2 Wages + 2.5% of UBIA: (0.25 x $80,000) + (0.025 x $200,000) = $20,000 + $5,000 = $25,000

In this case, the deduction cannot exceed the greater of $40,000 or $25,000, which is $40,000.

The QBI component is the lesser of 20% of QBI ($40,000) or 20% of taxable income ($80,000), subject to the W-2 wage and UBIA limitations. Therefore, the QBI component would be $40,000.

QBI Component Calculation Example

3.9. Key Considerations

When calculating the QBI component, keep the following considerations in mind:

• Accuracy: Ensure that all figures used in the calculation are accurate and properly documented.
• Consistency: Apply the same methods and assumptions consistently from year to year.
• Professional Advice: Consult with a qualified tax professional to ensure that you are properly calculating the QBI component and maximizing your deduction.

4. How Does the REIT/PTP Component Work?

The REIT/PTP component of the QBI deduction allows taxpayers to deduct 20% of qualified Real Estate Investment Trust (REIT) dividends and qualified Publicly Traded Partnership (PTP) income. This component is not limited by W-2 wages or the UBIA of qualified property, making it a valuable addition to the overall QBI deduction.

4.1. What Are REIT Dividends?

A Real Estate Investment Trust (REIT) is a company that owns, operates, or finances income-producing real estate. REITs pool the capital of numerous investors to make investments in real estate properties. REITs are required to distribute at least 90% of their taxable income to shareholders in the form of dividends.

Qualified REIT dividends are dividends received from a REIT that are not capital gain dividends or qualified dividend income. These dividends are eligible for the 20% deduction under the QBI rules.

4.2. What Is PTP Income?

A Publicly Traded Partnership (PTP) is a partnership whose interests are traded on an established securities market or are readily tradable on a secondary market or its substantial equivalent. PTPs often operate in industries such as energy, natural resources, and real estate.

Qualified PTP income is the net amount of income, gain, deduction, and loss from a PTP. This income is eligible for the 20% deduction under the QBI rules.

4.3. How Is the REIT/PTP Component Calculated?

The REIT/PTP component is calculated by taking 20% of the qualified REIT dividends and qualified PTP income. This is a straightforward calculation:

REIT/PTP Component = 0.20 x (Qualified REIT Dividends + Qualified PTP Income)

For example, if you have $5,000 in qualified REIT dividends and $3,000 in qualified PTP income, the REIT/PTP component would be:

REIT/PTP Component = 0.20 x ($5,000 + $3,000) = 0.20 x $8,000 = $1,600

4.4. How Does Taxable Income Affect the REIT/PTP Component?

The REIT/PTP component is subject to limitations based on the taxpayer’s taxable income. For taxpayers with income below certain thresholds, the full REIT/PTP component is allowed. However, for taxpayers with income above these thresholds, the REIT/PTP component may be limited.

For 2023, the thresholds are:

• Single Filers:
  • Below $182,100: Full component allowed.
  • Between $182,100 and $232,100: Component may be limited.
  • Above $232,100: Component may be fully or partially disallowed, depending on the type of business.
• Married Filing Jointly:
  • Below $364,200: Full component allowed.
  • Between $364,200 and $464,200: Component may be limited.
  • Above $464,200: Component may be fully or partially disallowed, depending on the type of business.

If your taxable income is above these thresholds, you will need to consider how the limitations affect the REIT/PTP component.

4.5. How Is the Overall QBI Deduction Calculated?

The overall QBI deduction is the sum of the QBI component and the REIT/PTP component, subject to certain limitations. The deduction is limited to the lesser of:

• The QBI component plus the REIT/PTP component, or
• 20% of the taxpayer’s taxable income minus net capital gain.

To calculate the overall QBI deduction, follow these steps:

1. Calculate the QBI component (as described in Section 3).
2. Calculate the REIT/PTP component (as described in this section).
3. Add the QBI component and the REIT/PTP component.
4. Calculate 20% of the taxpayer’s taxable income minus net capital gain.
5. The overall QBI deduction is the lesser of the amount calculated in step 3 or step 4.

Example:

Let’s say you are a single filer with taxable income of $200,000 and net capital gain of $20,000. Your QBI component is $30,000, and your REIT/PTP component is $5,000.

1. QBI Component: $30,000
2. REIT/PTP Component: $5,000
3. QBI Component + REIT/PTP Component: $30,000 + $5,000 = $35,000
4. 20% of Taxable Income Minus Net Capital Gain: 0.20 x ($200,000 – $20,000) = 0.20 x $180,000 = $36,000

In this case, the overall QBI deduction would be $35,000, as it is the lesser of $35,000 or $36,000.

4.6. Strategies to Maximize the REIT/PTP Component

To maximize the REIT/PTP component of the QBI deduction, consider the following strategies:

• Invest in Qualified REITs: Focus on investing in REITs that generate qualified REIT dividends, as these are eligible for the 20% deduction.
• Invest in Qualified PTPs: Identify and invest in PTPs that generate qualified PTP income, as this income is also eligible for the 20% deduction.
• Tax Planning: Work with a qualified tax professional to develop a tax plan that optimizes your investments in REITs and PTPs to maximize the REIT/PTP component.
• Diversification: Diversify your investments across different types of REITs and PTPs to reduce risk and increase the potential for qualified income.

4.7. How Can Strategic Partnerships Enhance the REIT/PTP Component?

Strategic partnerships can play a crucial role in enhancing the REIT/PTP component of the QBI deduction by providing access to a broader range of investment opportunities and expertise. By collaborating with other businesses and investors, taxpayers can leverage the collective knowledge and resources to maximize their returns from REITs and PTPs.

• Joint Ventures for Real Estate Investments: Forming joint ventures with other businesses to invest in real estate properties can provide access to larger and more profitable projects. These joint ventures can generate qualified REIT dividends and PTP income, thereby increasing the REIT/PTP component of the QBI deduction.
• Partnerships with Financial Advisors: Collaborating with financial advisors who specialize in REITs and PTPs can provide access to expert guidance and investment strategies. These advisors can help taxpayers identify and invest in qualified REITs and PTPs that align with their financial goals and risk tolerance.
• Strategic Alliances with Real Estate Companies: Forming strategic alliances with real estate companies can provide access to exclusive investment opportunities and insider knowledge. These alliances can help taxpayers identify and invest in undervalued properties that have the potential to generate significant REIT dividends and PTP income.

REIT PTP Component Calculation

4.8. Common Mistakes to Avoid When Claiming the REIT/PTP Component

Several common mistakes can lead to errors or missed opportunities when claiming the REIT/PTP component:

• Misidentifying Qualified REIT Dividends and PTP Income: Accurately identifying qualified REIT dividends and PTP income is critical. Failing to properly classify these items can lead to inaccuracies in the calculation of the REIT/PTP component.
• Incorrectly Applying Income Limitations: The income limitations can be complex. Failing to properly apply these limitations can result in an overstatement or understatement of the REIT/PTP component.
• Not Keeping Adequate Records: Keeping thorough and accurate records is essential for substantiating the REIT/PTP component.
• Failing to Consider Net Capital Gain: The overall QBI deduction is limited to 20% of the taxpayer’s taxable income minus net capital gain. Failing to consider net capital gain can result in an incorrect calculation of the overall QBI deduction.

5. What Are Specified Service Trades or Businesses (SSTBs)?

A Specified Service Trade or Business (SSTB) is a critical concept to understand when claiming the Qualified Business Income (QBI) deduction. The IRS defines an SSTB as any trade or business involving the performance of services in specific fields. The rules for SSTBs are more restrictive than for other types of businesses, especially for taxpayers with higher incomes.

5.1. Definition of SSTB

According to the IRS, an SSTB is defined as any trade or business involving the performance of services in the fields of:

• Health: This includes doctors, dentists, nurses, and other healthcare professionals.
• Law: This includes lawyers, paralegals, and legal consultants.
• Accounting: This includes accountants, CPAs, and bookkeepers.
• Actuarial Science: This includes actuaries and actuarial consultants.
• Performing Arts: This includes actors, musicians, dancers, and other performing artists.
• Consulting: This includes consultants providing advice and counsel to clients.
• Athletics: This includes athletes, coaches, and trainers.
• Financial Services: This includes financial advisors, wealth managers, and investment bankers.
• Brokerage Services: This includes stockbrokers, real estate brokers, and insurance brokers.
• Any Trade or Business Where the Principal Asset is the Reputation or Skill of One or More of Its Employees or Owners: This is a broad category that can include businesses such as celebrity endorsements, social media influencers, and chefs.

5.2. Why Are SSTBs Treated Differently?

SSTBs are treated differently under the QBI deduction rules because Congress believed that these businesses are less likely to create jobs and investment than other types of businesses. As a result, the QBI deduction is more restricted for SSTBs, especially for taxpayers with higher incomes.

5.3. Income Thresholds for SSTBs

The QBI deduction is subject to limitations based on the taxpayer’s taxable income. For SSTBs, the deduction is phased out for taxpayers with income above certain thresholds.

For 2023, the thresholds are:

• Single Filers:
  • Below $182,100: Full deduction allowed.
  • Between $182,100 and $232,100: Deduction is partially limited.
  • Above $232,100: No deduction allowed.
• Married Filing Jointly:
  • Below $364,200: Full deduction allowed.
  • Between $364,200 and $464,200: Deduction is partially limited.
  • Above $464,200: No deduction allowed.

If your taxable income is above these thresholds, the QBI deduction may be reduced or eliminated entirely, depending on your income level.

5.4. How Is the QBI Deduction Calculated for SSTBs?

The QBI deduction for SSTBs is calculated in the same way as for other types of businesses, subject to the income limitations. The deduction is limited to the lesser of:

• 20% of QBI, or
• 20% of taxable income.

However, for taxpayers with income above the thresholds, the deduction is phased out. The phase-out range is $50,000 for single filers and $100,000 for married filing jointly.

To calculate the QBI deduction for SSTBs, follow these steps:

1. Determine your QBI.
2. Calculate 20% of your QBI.
3. Determine your taxable income.
4. Calculate 20% of your taxable income.
5. Apply the income limitations.
6. If your income is above the thresholds, calculate the phase-out.
7. The QBI deduction is the lesser of 20% of QBI or 20% of taxable income, after applying the income limitations and phase-out.

5.5. Example Calculation for SSTBs

Here’s an example to illustrate the calculation of the QBI deduction for SSTBs:

Facts:

• Filer: Single
• Business: Consulting (SSTB)
• Taxable Income: $212,100
• QBI: $100,000

Calculations:

1. 20% of QBI: 0.20 x $100,000 = $20,000
2. 20% of Taxable Income: 0.20 x $212,100 = $42,420
3. Phase-Out Range: $182,10