Guide to the Qualified Business Income (QBI) Deduction

Modified on Wed, 24 Jan 2024 at 03:19 PM

Highlights:

  • The qualified business income (QBI) deduction is a federal tax deduction that allows eligible self-employed and small business owners to deduct up to 20% of the business income.

  • There are two components: the QBI and the REIT.

  • If your business is qualified as a specified service trade or business (SSTB), this deduction may be limited.

 

What is the qualified business income deduction?

The qualified business income (QBI) deduction is a federal tax deduction that allows eligible self-employed and small business owners to deduct up to 20% of their qualifying business income on their taxes. The deduction is available regardless of whether taxpayers itemize deductions or take the standard deduction when filing.

 

  • QBI Component: Per the IRS, this component of the deduction equals 20 percent of QBI from a domestic business operated as a sole proprietorship or through a partnership, S-corporation, trust or estate. 

  • REIT/PTP Component (Real Estate Investment Trust/Publicly Traded Partnership): Per the IRS, this component of the deduction equals 20 percent of qualified REIT dividends and qualified PTP income. 

In order to claim the QBI deduction in 2023, your taxable income needs to be less than or equal to less than or equal to $182,100 if single, married filing separately, head of household, or qualifying surviving spouse or $364,200 if married filing jointly.

 

What does QBI not include?

QBI excludes the following: income generated outside the United States, investment income, W-2 compensation paid to an S-corporation owner, guaranteed payments to a partner, and income from REITs, publicly traded partnerships, and qualified cooperatives.

 

More information about what QBI does not include can be found here.

 

What is a qualified trade or business?

Per the IRS, a qualified trade or business is any section 162 trade or business, with three exceptions:

  1. A trade or business conducted by a C corporation.

  2. The trade or business of performing services as an employee.

  3. For taxpayers with taxable income that exceeds the threshold amount: specified service trades or businesses (SSTBs).

Note: The SSTB classification doesn’t come into play as long as total taxable income is under $182,100 ($364,200 if filing jointly). At higher income levels, the deduction for SSTBs is reduced and in some cases, eliminated.

 

What are SSTBs and how do they impact the QBI deduction?

Per the IRS, specified service trade or business (SSTB) is a trade or business involving the performance of services in one of the following fields: health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, investing and investment management, trading or dealing in certain assets, or any trade or business where the principal asset is the reputation or skill of one or more of its employees or owners. 

 

This content is provided for informational purposes only and should not be construed as tax, legal, financial, accounting, or other advice. Rules and regulations vary by location and are subject to change, so please consult with an expert if you need advice specific to you.

 

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