If you are self-employed or a small business owner, you can take advantage of the IRS Qualified Business Income (QBI) deduction to reduce your taxes. Introduced in 2017 as part of the Tax Cuts and Jobs Act (TCJA), QBI aims to stimulate economic growth by providing much-needed tax relief for eligible businesses and business owners.
Continue reading to find out about QBI eligibility requirements, how much QBI can reduce taxable income, and current QBI income limits.
What Is the IRS Qualified Business Income Deduction?
As the QBI name suggests, a qualified business income deduction allows self-employed individuals and/or some business owners to deduct up to 20% of qualified income from taxable income to lower taxes.
Who Is Eligible for the QBI Deduction?
This deduction is available for individuals with pass-through income that they report on a personal tax return.
Here are the specific criteria to qualify for the QBI deduction:
Type of Business
The QBI deduction is available for pass-through entities like sole props, partnerships, S corps, and LLCs.
Qualified Income
Net amount of income or profit for a business. Note that income from capital gains/losses, dividends, and/or interest is not counted for QBI. Also, some wages, shareholder payments, and income earned outside the US are excluded.
Limits for Taxable Income
QBI is limited based on a taxpayer’s taxable income. QBI limits capped at $182,100 for single filers or $364,200 for joint filers for 2023. In 2024, QBI limits increase to $191,950 for single filers and $383,900 for joint filers.
When you exceed the QBI limits, you must separately determine whether you qualify for a full or partial QBI deduction based on complex IRS QBI rules.
Qualified Business
When you earn more than the QBI limit amount, the IRS will evaluate your business to determine whether you qualify for a partial QBI deduction. Some industries, like financial, healthcare, and legal may be excluded or more limited for QBI deductions.
Limits for Wages and Property
High-income earners and businesses with complex structures also have stricter QBI limits to take a deduction.
How Much Of Your Qualified Business Income Can You Deduct for Taxes?
In most cases, you can deduct 20% of your QBI if you are a partnership, S corp, or sole prop. However, there are QBI limits as discussed above based on factors such as qualified income, taxable income, and industry. These limits can reduce your QBI amount.
Can You Take the Qualified Business Income Deduction Even If You Don’t Itemize?
Yes, you can still claim the QBI deduction when you do not itemize deductions. However, this requires that you use the standard deduction. Your standard deduction amount is based on your tax filing status.
Use the IRS online tool at https://irs.gov/help/ita/how-much-is-my-standard-deduction to determine how much your standard deduction will be.
How Do You Calculate QBI?
Here are some of the key steps to calculate your QBI:
1. Determine If Your Business Is Eligible
Make sure your business qualifies for the QBI deduction. While most businesses are eligible, some businesses and services considered to be SSTBs may have additional limitations or even exclusions when taxable income exceeds QBI limits.
2. Calculate Your QBI
Determine the net income or profit from your qualified business. As mentioned earlier, income cannot include earnings from sources like capital gains, dividends, and interest.
3. Find Your QBI Limit
Most taxpayers will simply use filing status and taxable income to figure out the QBI limit. SSTBs have separate limits and exclusions for QBI deductions.
4. Calculate Your QBI Deduction
As we mentioned earlier, the QBI deduction is generally 20% of your QBI. However, the deduction may be limited based on items such as taxable income, W-2 wages paid, and type of business.
5. Apply W-2 Wage and Capital Limit
If your taxable income exceeds QBI limits, the QBI deduction may be limited based on the greater of:
- 50% of the W-2 wages paid by the business, or
- 25% of the W-2 wages paid by the business plus 2.5% of the unadjusted basis of qualified property.
6. Other Limitations
Additional limitations may apply to QBI deductions, especially for SSTBs. It is important to understand the specific rules and guidelines for your specific business/industry.
How Do You Claim the QBI Deduction for Taxes?
To claim your QBI deduction, complete Form 8995 (Qualified Business Income Deduction Simplified Computation). You can find IRS 8995 at irs.gov/forms-pubs/about-form-8995. For more complex QBI cases, like a high-income earner, use Form 8995-A (Qualified Business Income Deduction) instead. IRS 8995-A is available online at irs.gov/forms-pubs/about-form-8995-a.
QBI calculations can be quite complicated and different for each specific business.
Need more help? You can start online by answering 6 simple questions.
6 Simple Questions. Free Evaluation.