Qualified Business Income (QBI) refers to the net amount of income, gain, deduction, and loss from a qualified trade or business that is effectively connected with the conduct of a trade or business in the United States. It is used to calculate the Qualified Business Income Deduction (Section 199A deduction), which allows eligible taxpayers to deduct up to 20% of their QBI from pass-through entities such as sole proprietorships, partnerships (excluding publicly traded partnerships), S corporations, and certain trusts and estates.
What Is Included in Qualified Business Income?
- Ordinary business income or loss from a trade or business, including income from partnerships (other than publicly traded partnerships), S corporations, sole proprietorships, and certain estates and trusts.
- Items attributable to the trade or business, such as unreimbursed partnership expenses, business interest expense, deductible part of self-employment tax, self-employment health insurance deduction, and contributions to qualified retirement plans.
- Income from qualified real estate investment trusts (REITs) and qualified publicly traded partnerships (PTPs), as specified in the tax code.
What Is Excluded from Qualified Business Income?
- Wage income (except for statutory employees where Form W-2, box 13, is checked).
- Reasonable compensation received from an S corporation.
- Guaranteed payments to partners or payments for services rendered by a partner.
- Capital gains or losses under any provision of the Internal Revenue Code.
- Dividends and dividend equivalents.
- Interest income not properly allocable to a trade or business.
- Commodities transactions or foreign currency gains or losses.
- Income, loss, or deductions from notional principal contracts.
- Annuities (unless received in connection with the trade or business).
- Qualified REIT dividends and qualified PTP income (these are separately included in the deduction calculation but not part of QBI itself).
- Tip income under section 224 that is excluded from net profit.
Special Considerations
- Losses or deductions suspended under other tax code provisions (e.g., sections 163(j), 179, 469) are not included in QBI for the year they are suspended. They are only included when allowed in calculating taxable income.
- For taxpayers with taxable income above certain thresholds ($197,300 for single filers, $394,600 for married filing jointly), additional limitations apply based on the type of business (e.g., specified service trades or businesses — SSTBs).
- Payments reported on Form 1099-PATR from agricultural or horticultural cooperatives may be included in QBI only if they meet specific criteria and are reported as qualified income items. Patrons of such cooperatives must use Form 8995-A and reduce QBI by the patron reduction.
Source:
Form 8995 Instructions
Form 8995-A Instructions
Form 1040 Instructions
Disclaimer: Always verify details with the current year’s Federal or State Department of Revenue Forms and Instructions. For complex situations, consult a CPA or tax attorney.