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What is the Qualified Business Income (QBI) Deduction?

Date of Posting : June 30, 2020

According to Section 199A of the Internal Revenue Code, many taxpayers are eligible for a qualified business income deduction from a skilled trade or business that is operated directly or indirectly via a pass-through entity. This type of deduction has two segments:

The eligible taxpayers may be entitled to a deduction of up to 20 percent of qualified business income (QBI) from a business operated domestically as a sole proprietorship or through a partnership, S corporation, trust, or estate. Individuals paying taxes with taxable income exceeding $315,000 for a married couple who file an income tax jointly, or $157,500 for all other taxpayers, the deduction is limited and subject to cases like the type of trade or business, the taxable income of the taxpayer, the W-2 wages paid by the qualified trade or business and the UBIA or unadjusted basis immediately after acquisition of eligible property owned by the trade or business. Income earned through a C corporation or by providing services as an employee will not be able to get the deduction.

Eligible taxpayers may also be entitled to a deduction of up to 20 percent of their combined qualified REIT, real estate investment trust dividends, and qualified PTP that is publicly traded partnership income. This segment of the QBI deduction of the section 199A deduction is not restricted to W-2 wages or the eligible UBIA property.

The sum of these two segments is called the combined qualified business income amount.

This amount is generally lesser of the combined eligible business income amount and 20 percent of the taxable income subtracting the taxpayer’s net capital gain. To check the deduction figures, go to Q&A 6 and 7. This deduction is viable for taxable years starting Dec. 31, 2017. Most eligible taxpayers claimed it for the first time when they filed their federal income tax of 2018 in 2019. This deduction is possible, provided an individual can itemize his or her deduction on Schedule A or go with the standard deduction.