The Qualified Business Income Deduction (or QBID) is a provision in the Tax Cuts and Jobs Act of 2017. You may also hear this referred to as Section 199A or a Section 199A Deduction.
The short version this post is that the QBID allows you to deduct 20% of Qualified Business Income.
Qualified Business Income is income derived from a pass-through entity, such as a partnership, LLC, or S-corporation that you operate or in which you are a partner. However, most of this post covers the caveats, reductions, and limitations (because there are always caveats, reductions, and limitations).
Basically, these reductions depend on your income and then whether your business is a Specific Service Trade or Business. So I go through all of that below.
In short, you may deduct 20% of qualified business income that you earn from a partnership, S-corporation, or LLC from your taxable income.
In the case of a partnership or S-corporation, the deduction applies at the partner or shareholder level.
Now we move on to the caveats.
QBI is the net income, gain, deduction, and loss you earn through your business. It includes all operating income and income from rental activities (unless this is income from property held for investment and reported on Schedule E).
The net amount is the amount after you have included any deductions, including:
You should not include these items as Qualified Business Income:
Once you calculate your Qualified Business Income, the next step is to check the income limits and thresholds. Income above a certain level will reduce your Qualified Business Income Deduction.
This section goes through the income limit and thresholds for the QBID. If your income exceeds the threshold amount, there is a formula to calculate your deduction. If your income does not exceed this threshold, you don’t have to worry about the formula.
Here are the 2021 thresholds and phase-out ranges. This is all taxable income, not Adjusted Gross Income:
|Single, Head of Household,||Married Filed jointly||Married Filed Single|
(for SSTB, see below)
|$164,901 – $214,900||329,801 – 429,800||164,926 – 214,925|
|Full Limitation Applies
(per W-2 Wages/Property Limitation, full exclusion of SSTB)
|$214,901 and higher||$429,801 and higher||$214,926 and higher|
This limitation is called the form W-2 Wages/Property limitation, and it depends on two factors, the W-2 wages paid by the business and the business’s capital expenditures. The limit caps the total deduction. It is the greater of:
Assume Mike operates a sole proprietorship that makes beef jerky. His Qualified Business Income for 2021 was $180,000, and his taxable income is $225,000. The business bought some new equipment for $100,000 and put it into service in 2021. Mike has one employee and paid a total of $20,000 in Form W-2 wages.
Mike’s unadjusted QBID is 20% of $180,000 or $36,000.
However, because his income is greater than $214,901, he is subject to the Form W-2 wages/property limit, which is the greater of:
Mike’s limit is the greater of $10,000 or $7,500, so the total amount he can deduct is $10,000.
The deduction applies to qualified trade or businesses.
A qualified trade or business includes any trade or business for which you may deduct ordinary and necessary business expenses.
The definition expressly excludes:
The Specific Service Trade or Business (referred to as SSTB) exclusion is an important one.
If your income is above the threshold but below the full limitation amount, then SSTB income phases out. Once you reach the full limitation amount, SSTB income is excluded entirely.
An STTB is any trade or business providing services in the following fields:
If your taxable income is within the phase-out range, then you calculate your percentage of the phase-out, multiply that by your income, reduce the qualified business income by that amount and take 20% of the remainder.
Assume June is an attorney with a taxable income of $178,200. Her Qualified Business Income is $150,000. Her business as a lawyer is an SSTB, and her taxable income is over the threshold but below the full exclusion limit.
This is how she calculates her reduction:
First she calculates the income amount that exceeds the threshold: $178,200 – $164,900 = 13,300
Then she calculates this as a percentage of the phase-out amount, $50,000 (this would be $100,000 if married filing jointly): $13,300/$50,000 = 26.6%.
She multiplies the 26.6% times her total income ($178,200) to get the amount by which she reduces her qualified business income, $178,200 times 26.6% = $47,401.
Her qualified business income is $150,000, so she subtracts $47,401 from $150,000 to get $102,599.
Her QBID is 20% of the $102,599 remaining, so $20,520.
If her income is above the full limitation, then she does not qualify for the QBID.
If you have business income this is worth looking into. A 20% tax deduction will make a big difference in your taxes. The calculations can get complicated so if you would like us to go through this with you, set up a time to talk below. Let’s see if you qualify for this deduction.
The IRS has more information available here as well.
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