How is the Deduction for Qualified Business Income Computed?
The deduction for qualified business income (QBI), also known as the Section 199A deduction, allows eligible taxpayers to deduct up to 20% of their qualified business income from pass-through entities such as sole proprietorships, partnerships, S corporations, and certain trusts and estates.
Eligibility Criteria
- Taxpayers must have qualified business income (QBI), section 199A dividends, or qualified publicly traded partnership (PTP) income.
- The deduction is available if the taxpayer’s taxable income before the QBI deduction is $197,300 or less ($394,600 if married filing jointly) for 2025.
- The business must meet IRS standards for being a qualified trade or business.
Computation Methods
Taxpayers can use one of two forms to compute the QBI deduction:
- Form 8995 – Qualified Business Income Deduction Simplified Computation: Use this form if all eligibility criteria are met and the taxpayer’s taxable income is within the threshold limits.
- Form 8995-A – Qualified Business Income Deduction: Use this form if the taxpayer does not meet the simplified criteria or if more detailed computation is required.
Steps to Compute the Deduction
- Calculate your qualified business income (QBI) from Schedule C, Schedule E, or Schedule F.
- Subtract any business deductions allocable to the trade or business (not reported on Schedule C, E, or F).
- Apply the 20% deduction to the resulting QBI amount, subject to limitations based on taxable income and business type.
- Report the deduction on Line 13a of Form 1040 or Form 1040-NR (for nonresident aliens).
Important Notes
- The deduction is phased out for taxpayers with taxable income above the threshold limits.
- Special rules apply for specified service trades or businesses (SSTBs), which may limit or disallow the deduction based on income level.
- For more detailed guidance, refer to the instructions for Form 8995 and Form 8995-A.
Source:
Publication 225
Schedule K-1 (1065)
Form 8995-A
Form 1040
Disclaimer: Always verify details with official Federal or State Department of Revenue Forms and Instructions.