What is the Qualified Business Income (QBI) Deduction?

Introduced under the Tax Cuts and Jobs Act (TCJA) of 2017, the Qualified Business Income (QBI) Deduction lets qualifying self-employed people and pass-through business owners deduct up to 20% of their taxable income from their qualified business income.

Small business owners, freelancers, and some investors benefit from this deduction in terms of tax load.

Who is Eligible for the QBI Deduction?

• Taxpayers have to qualify by fulfilling the following requirements:
  • The business has to be an LLC taxed as a pass-through organization, partnership, S-corporation, or sole proprietorship.
  • Income must come from an eligible U.S.-based trade or enterprise, excluding wages, capital gains, dividends, and interest.

Income Ceiling

• The deduction in 2024 begins phasing out for taxable income beyond:
  • $191,950 (single filers)
  • $383,900 (married filing jointly)
• Should income exceed the threshold, Specified Service Trades or Businesses (SSTBs) such as doctors, attorneys, consultants, and financial advisors could get no or lower deduction depending on income.

What is the Method of QBI Deduction Calculation?

• The deduction is the smaller of:
  • Twenty percent of pass-through entity qualifying business income (QBI).
  • Twenty percent of taxable income less capital gains.
• For high-income individuals over the threshold, other rules apply including W-2 pay limits and the unmodified basis of qualifying property (UBIA) test.

Restrictions & Exclusions

• Certain investment income, capital gains, dividends, and wages do not qualify.
• SSTBs contain restrictions should revenue surpass the phase-out cap.
• If they satisfy active involvement criteria, real estate rental companies could qualify.

Claiming the QBI Deduction

• Depending on income levels, Form 8995 or Form 8995-A shows the deduction.
• On Form 1040, it is subtracted below the line (not itemized) and has no effect on adjusted gross income (AGI).

What Makes the QBI Deduction Significant?

Available until 2025; Congress may extend this.

Aids companies and entrepreneurs in lowering taxable income.

Lowers tax obligations, hence promoting company reinvestment.

This entry was posted on Thursday, April 3rd, 2025 at 7:22 pm and is filed under Credits, Deductions, Tax Related Questions. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.