Is My Business Qualified for QBI?
Qualified Business Income (QBI) is a key component for individuals who earn income through pass-through entities such as sole proprietorships, partnerships (excluding PTPs), S corporations, and certain trusts and estates. The QBI deduction allows eligible taxpayers to deduct up to 20% of their net QBI, subject to certain limitations.
What Is Qualified Business Income (QBI)?
QBI includes qualified items of income, gain, deduction, and loss from trades or businesses effectively connected with the conduct of a trade or business in the United States. This includes income from:
- Sole proprietorships
- Partnerships (other than publicly traded partnerships)
- S corporations
- Certain estates and trusts
QBI does not include items that are disallowed or limited under other tax rules, such as basis, at-risk, passive loss, or excess business loss rules. Additionally, items treated as capital gains or losses or dividends/dividend equivalents are excluded from QBI.
What Items Are Included in QBI?
To calculate QBI, consider all items attributable to the trade or business, including:
- Unreimbursed partnership expenses
- Business interest expense
- Deductible part of self-employment tax
- Self-employment health insurance deduction
- Contributions to qualified retirement plans
However, QBI does not include items that are not properly includible in taxable income.
Eligibility Requirements for QBI Deduction
To claim the QBI deduction, you must meet the following criteria:
- You must have QBI, section 199A dividends, or PTP income.
- Your taxable income before the QBI deduction must be $197,300 or less if filing as single, married filing separately, head of household, qualifying surviving spouse, or trust/estate; or $394,600 or less if married filing jointly.
- You must not be a patron in a specified agricultural or horticultural cooperative.
If you do not meet all three requirements, you must use Form 8995-A instead of Form 8995.
How to Claim the QBI Deduction
You can claim the QBI deduction using either Form 8995 or Form 8995-A, depending on your eligibility:
- Form 8995: Use this if you meet all three eligibility requirements listed above.
- Form 8995-A: Use this if you do not meet all three requirements.
When completing these forms, ensure you report your taxable income before the QBI deduction. For Form 1040 or 1040-SR filers, this is calculated as line 11a minus Schedule 1-A, Part II, line 13, and then minus line 12e.
Important Notes
- The QBI deduction is limited to 20% of your taxable income (before the deduction).
- If your taxable income is $0, no QBI deduction can be claimed.
- If your business income comes from a K-1, ensure entries are made in the Other Information section using the correct QBI codes for accurate calculation.
- You can claim the QBI deduction for multiple businesses by entering each business’s information separately in your tax software.
Source:
Form 8995 - Qualified Business Income Deduction Simplified Computation
Form 8995-A - Qualified Business Income Deduction
Disclaimer: Always verify information with official Federal or State Department of Revenue Forms and Instructions.