Qualified Business Income (QBI) is generally calculated based on the net income, gain, deduction, or loss from a qualified trade or business that is effectively connected with the conduct of a trade or business in the United States. If your business is not profitable and you have a net loss, your QBI may still include certain deductions and losses, but only if they are “qualified” under the rules of section 199A of the Internal Revenue Code.
QBI and Business Losses
If your business results in a net loss, that loss may still be considered part of your QBI if it qualifies under the rules. However, losses or deductions that are suspended under other provisions of the Code (such as sections 163(j), 179, 461(l), 465, 469, 704(d), or 1366(d)) are not considered qualified losses or deductions for QBI purposes in the year they are suspended. Instead, they are taken into account in the tax year they are allowed in calculating taxable income.
When such suspended losses or deductions are later allowed (e.g., in a future year), only the portion attributable to QBI must be included in your QBI calculation for that year. To determine this portion, you calculate the percentage of the total loss attributable to QBI and apply it to the allowed loss or deduction.
QBI Deduction and Net Losses
If you have a qualified business net loss for the year, you generally do not qualify for the QBI deduction unless you also have qualified REIT dividends or qualified PTP income. In such cases, the net loss is carried forward to the next tax year and does not affect the deductibility of the loss under other provisions of the Code.
Important Exclusions from QBI
- Wage income (except for statutory employees where Form W-2, box 13, is checked)
- Reasonable compensation from an S corporation
- Guaranteed payments to partners
- Payments for services as a partner (not in capacity as a partner)
- Capital gains or losses
- Dividends and interest not allocable to a trade or business
- Commodities or foreign currency transactions
- Annuities (unless received in connection with the trade or business)
- Qualified REIT dividends or Qualified PTP income
Specified Service Trades or Businesses (SSTBs)
If your business is an SSTB (such as law, accounting, financial services, etc.), it may not qualify for the QBI deduction if your taxable income exceeds certain thresholds. For SSTBs, whether a trade or business is qualified is determined based on your taxable income in the year the loss or deduction is incurred. If your income is within the phase-in range, you must apply the applicable percentage to determine the qualified portion of suspended losses or deductions.
Losses and deductions retain their qualified or non-qualified status while suspended. You must track them until they are no longer suspended.
Source:
Form 8995 Instructions
Form 8995-A Instructions
Disclaimer: Always verify with current Federal or State Department of Revenue Forms and Instructions. This guidance is general and may not apply to your specific situation. Consult a CPA or tax attorney for personalized advice.